Public Bill Committee

[Mr. Eric Illsley in the Chair]

None

Stephen Timms: On a point of order, Mr. Illsley, and I welcome you to the Chair. This morning, when Mr. Gale was in the Chair, it came to light that Committee members had not received copies of the draft regulations that were relevant to our discussions. We had sent copies of them to you, Mr. Illsley, to Mr. Gale and to the hon. Members for Chipping Barnet and for Falmouth and Camborne, but not to other Committee members.
 Copies of all letters sent to date about the Bill’s secondary legislation and accompanying draft regulations have in the past few minutes been sent to members of the Committee to ensure that everybody has the information that they need. Copies of my letter of 9 May are also being sent. It included information on the regulation-making powers in schedule 3, which we shall debate this afternoon. I shall ensure that all future letters on secondary legislation are sent to you, Mr. Illsley, and copied not only to the shadow spokespeople but to all Committee members. I apologise to all Committee members for the inconvenience that they were caused this morning.

Eric Illsley: The Chair is grateful to the Minister for addressing the concerns that Committee members raised this morning. As I understand it from what he said, the relevant documents have been circulated to Committee members.

Schedule 3

Managed service companies

Amendment moved [this day]: No. 38, in schedule 3, page 90, line 16, after ‘payments’, insert ‘for a year of assessment’.—[Mrs. Villiers.]

Eric Illsley: I remind the Committee that with this we are discussing the following: No. 39, in schedule 3, page 90, line 19, after ‘services’, insert ‘for that year of assessment’.
No. 40, in schedule 3, page 90, line 21, leave out from ‘person’ to ‘the’ in line 22 and insert
‘whose sole or main business is the provision and facilitation of’.
No. 41, in schedule 3, page 90, line 23, leave out ‘involved with the company’ and insert
‘regularly involved with all or most aspects of running the company on an ongoing basis’.
No. 42, in schedule 3, page 90, line 24, at end insert—
‘(1A) In considering whether a company is a managed service company within the meaning of subsection (1), no regard shall be had to any other companies with which the MSC provider is involved’.
No. 43, in schedule 3, page 90, line 35, leave out ‘subsection’ and insert ‘subsections’.
No. 44, in schedule 3, page 90, line 35, after ‘(1)(d)’, insert ‘or (2)’.
No. 45, in schedule 3, page 90, line 36, leave out from ‘providing’ to end of line and insert
‘services of a nature provided by advisers in a professional capacity, including legal, accounting and company secretarial advice.’.
No. 46, in schedule 3, page 90, line 36, at end insert—
‘(3A) For the purposes of subsection 3, accounting advice includes, but is not limited to, advice and assistance concerning:
(a) preparation or provision of records, returns, financial statements, reports or financial information concerning accounting;
(b) auditing, insolvency or taxation matters;
(c) communication and representations made on behalfof a client to third parties in matters concerning accounting, auditing, insolvency or taxation.
(3B) The Treasury may by order provide for a non-exhaustive list of professional services which fall within the meaning of subsection (3) and (3A) above.
(3C) The Treasury may not make an order under subsection (3B) unless a draft of it has been laid before and approved by a resolution of the House of Commons.’.
Government amendment No. 97
No. 47, in schedule 3, page 91, line 2, at end insert—
‘(3A) An MSC provider may be a partner in a partnership (other than the individual referred to in section 61B(1)(a)) and may, for the purposes of section 61B(1)(d), carry on, through the partnership, the business of promoting or facilitating the partnership to provide the services of individuals.’.
No. 48, in schedule 3, page 92, line 2, leave out ‘mentioned in section 61D(1)(b)’ and insert
‘which satisfies both section 61D(1)(b) and section 61D(1)(c).’.

Theresa Villiers: Thank you, Mr. Illsley. I welcome you to the Chair.
I had just started to address the position of staffing and recruitment companies and employment agencies in the schedule. The purpose of the Opposition’s amendments to the definition of a managed service company provider is to focus on those people
“whose sole or main business relates to the provision and facilitation of”
 use of service companies. If the amendments were agreed to, they would remove the threat of liability from staffing and recruitment and employment companies, because they would be only incidentally involved with managed service companies. Their main business would be related to placing individuals, which would be different.
 Proposed new section 61B(4) of the Income Tax (Earnings and Pensions) Act 2003 provides some protection for staffing companies, but its ambit is unclear, and I hope that Government amendment No. 97 will provide further assurance to the recruitment sector. It is vital that we clarify the position of recruitment companies in the schedule, because damaging the recruitment industry could have a negative impact on the flexibility of the UK labour market.
The key concern is that if a recruitment company has any influence over the choice of service company or the professional adviser through the workers with whom it is involved, the company could be liable for “promoting or influencing” within the meaning of new section 61B. That is a particularly strong concern when staffing companies have contractual control over the freelance worker, as many do. Furthermore, many staffing and recruitment companies influence the way in which payments are made to the worker, and again, such influence might trigger the MSC provider status that we were discussing before the Committee adjourned.
I make it clear that the Government’s response to the recruitment industry’s concerns is welcome; many of its representatives are pleased by their movement on that issue. However, we still need more clarity and we need to asses what risk mitigation steps the recruitment industry can take to avoid inadvertently falling within the scope of proposed new section 61B. The feedback that I have had is that the recruitment industry wants to be compliant, but it does not know what compliance looks like.
 It would be useful, for example, if the Chief Secretary could confirm whether holding a list of approved company suppliers and advisers is sufficient to amount to “promoting and influencing” within the meaning of paragraph (d). It would be unfortunate if the changes that we are considering under schedule 3 were to encourage staffing and recruitment companies to take no interest in the contracting arrangements of their contractors and workers, as that would remove an important quality control that is currently exercised. The absence of a tax status review by staffing or recruitment companies could increase the likelihood that less reputable operators—the kind of people about whom Her Majesty’s Revenue and Customs is concerned—have more, not less, scope to supply their services.
 Amendments Nos. 42 to 44 concern the problem of tainting, about which I have received a number of representations. The anxiety is that if an adviser has a sufficiently close relationship with a client to be deemed to be “promoting or facilitating” under paragraph (d), it will become an MSC provider in relation to any client and any company with which it is involved. The Bill does not specify that the promotion or facilitation must relate to one particular company. Provision of services within the meaning of paragraph (d) could taint all the companies with which the adviser deals. The upshot will be that a freelancer will be faced with the hassle not only of ensuring that the relationship between her company and her professional advisers is compliant and does fall not within paragraph (d), but that her adviser does not provide any non-compliant services to other clients. Frankly, that will be difficult in practice.
It will also be difficult for end clients and staffing companies that are anxious to comply with the legislation to ensure that they are not brought within third-party debt rules, via an indirect connection to a company that has a non-compliant relationship with another adviser or client. There is a real danger of litigation if someone finds their tax bill suddenly increasing because their adviser entered into a non-compliant relationship with other clients.
 The amendments are intended to deal with such tainting. Amendment No. 42 proposes a new subsection (1A) to make it clear that one should consider only the relationship between the scheme provider and the company whose tax affairs are under consideration. It is important to bear in mind that this is a serious problem, which could have a significant impact on how the proposals are enforced. If HMRC believes that a particular company falls within the MSC provider definition, for example, it will presumably inform not only that company, but all its clients. They will immediately leave, because they will be worried about being tainted by the activities of that particular scheme provider. That could trigger an instant cash-flow crisis and, quite possibly, put the provider out of business instantaneously. We therefore need to deal with the issue of tainting. The Bill might not be intended to have that effect, but I fear that that is the effect that it might have. It could cause significant inconvenience for freelance workers.
 Amendments Nos. 38 and 39 are essentially tidying-up points that were suggested by the Law Society in its useful briefing on the Bill for the Committee. They would amend proposed new section 61B(c), which specifies one of the triggering factors for a situation to be categorised as one involving a managed service company. A situation would be considered as such if the way in which payments are made to the worker would result in her receiving payments that exceed those amounts that she would receive, even if every payment made in respect of the services provided were employment income.
Committee members will see from the briefing that the Law Society welcomes paragraph (c) as helpful, because it prevents the mere provision of services of individuals from giving rise to MSC status even when employee tax is paid. It makes the sensible point that the Bill does not specify the period for which test is to be applied, however. The amendments would makeit clear that the relevant period is the year of assessment.
 Amendment No. 47 was also a useful suggestion by the Law Society. It is designed to remove a possible loophole in the framework. The provisions seem to be somewhat unclear as to how they impact on partnerships. The amendment is intended to go with the grain of the Government’s proposals and ensure that they operate effectively in relation to partnerships and also to ensure that a partnership structure cannot be used as a loophole. So the amendment would extend the reach of the proposals to make them bite in a situation where the scheme provider is a partner in a partnership, which amounts to the MSC. The Government’s drafting seems to be largely based on a corporate model and it does not seem to work exactly in relation to partnerships. The amendment might help to achieve greater clarity and ensure that the measure operates more clearly in relation to partnerships.
 Amendment No. 48 is another tidying-up amendment. It is essentially a technical point to ensure that any payment taken into account for the extra MSC taxes does not include payments that have already been taxed as earnings elsewhere. The consequence of the application of the MSC legislation is that various payments are treated as if they were the earnings of an employeefor tax purposes, and therefore they are subject to PAYE and national insurance. Where the Bill applies, these payments become part of what is referred to as the deemed employment payment. That is calculated using a series of steps set out in the proposed new section 61E(1). Step 1 defines
“the amount of the payment or benefit mentioned in 61D(1)(b).” 
However, new section 61D(1)(b) covers all payments received by the worker, including those that have already been taxed as employment earnings. Therefore, if that measure is left unamended, there is a danger that extra taxes would be applied to earnings thathave already been taxed as employment earnings. By adding, as this amendment would, a reference to new section 61D(1)(c), payments already taxed as earnings are excluded from the scope of the deemed employment payment.
I would like to turn to amendment No. 49, which focuses on a concern raised by the Private Contractors Group.

Eric Illsley: Order. The hon. Lady is speaking to amendment No. 49, which is in the next group of amendments.

Theresa Villiers: I apologise, Mr. Illsley. That was an error on my part; I must have got the number of the amendment wrong.
 In conclusion on this group of amendments, the Committee has listened patiently, which I appreciate, to my lengthy submission on the potential problems caused by schedule 3 and the best way, in our view, to deal with those potential problems. I have spoken at length about the position of the professional advisers. I have done so partly out of concern for the position of those professionals, but my main reason for doing so concerns their clients—hard-working, hard-pressed freelance workers, who are just trying to make an honest living. It is their relationship with their professional advisers that the Government have chosen to focus on in determining how much tax those people will pay and whether their company is treated as a MSC. That is why I have dwelt on the relationship with advisers.
I emphasise that being a freelance worker does not make someone a tax dodger. Yes, the tax system for freelancers is different to that for employees, but one must factor in the fact that those workers get no sickness pay, no holiday pay and no employer-funded pension schemes. With IR35, the Government have hit those people with hassle and huge compliance costs. The hon. Member for Wirral, West may not be worried about IR35, but thousands of contractors are. The Opposition are proud of the stance that we took on IR35. If the hon. Gentleman has not had many e-mails so far, I suspect that he might get a few more in the future. Now the Government, to add insult to injury, are not only imposing the hassle of IR35, but they want to prevent contractors from getting professional help with navigating the bureaucracy caused by IR35 and other regulations produced by the Government.
I close by reading an e-mail that I received from an IT contractor, Steve Birchall, which sets out just how disruptive schedule 3 is proving to be even before it is on the statute book. He said:
“I used to use a MSC simply because they made sure that all required tax, VAT and legal requirements were met. In particular they ensured that I had a clear and full understanding of how much of the money my company had in its accounts was mine and how much needed to be paid to the various government bodies, VAT, NI, Income tax. Corporation tax etc. etc.
I DID NOT use this as a vehicle to avoid tax.
If I wanted to do this a normal Ltd company option provided more tax savings due to the ability to reclaim more VAT and claim certain additional expenses. I simply wanted someone to look after the finances of the company so that I did not personally spend any money that should have been put aside for taxes etc. I just wanted a clear indication of what was MY money to spend and what had to be paid over or put aside.
Due to the recent changes relating to MSCs, I have now been robbed of that option. I have tried to find a company that would help with the financial running of the business, but in every case they have stated that they cannot now do this, for fear of being seen as having some control of my company and in so doing, incur risks and penalties.
So I now find myself being responsible for running a company (that I don't want to run) and having full responsibility for the tax, NI, VAT etc, bills, with no help from anyone. I have the use of my accountant, but they can only do so much to help because they fear that they might be held responsible for any tax claims from HMRC should that situation arise.
It does seem crazy to me that I now cannot use a professional body to help me control my finances, this would seem to be a responsible thing for me to do and yet I risk financial penalty just for trying to act responsibly.”
On behalf of Mr. Birchall and the thousandslike him, I urge the Minister to think again about schedule 3 and accept the Opposition’s amendments.

Stewart Hosie: I support the principles behind the schedule. It is right and proper that the Government seek to stamp out the misuse of managed service companies, particularly when employees are unaware of the situation, by self-employed contractors and organisations that are, to some extent, no more than posh gangmasters. It is right and proper that such misuse is sorted out. In the light of my own experiences, however, I do not think that some of the provisions in the schedule will work. I think that its impact will be much wider and broader than the Government intend.
I was a self-employed contractor working with recruitment companies and using an accounting service company, although I suspect that they were not called that in those days. I have been a departmental manager, a project manager and an operations manager in large private and public well-funded start-up companies and have employed contracting companies and individual contractors, both directly through those companies and through recruitment agencies. I know that many of them, and many others in various sectors at the moment, manage their affairs through accounting and managed service companies for the very reasons that the hon. Lady described in the e-mail that she quoted.
From my experience and that of those with whom I have spoken, I find it difficult to understand how the legislation would not have an unintended impact on any of the professional bodies currently assisting those people. I would like, therefore, to go through the Conservative amendments and make a few points about some flaws in the Bill.
As the hon. Lady said, amendments Nos. 30 and 39 would simply clarify the year in which calculations are to be made. That is a tidying-up matter. Amendment No. 40 would replace the words in the schedule with:
“whose sole or main business is the provision and facilitation of”.
That is a key amendment, because it narrows the scope of the provisions in relation to third-party companies carrying out their business, and excludes thosewho might facilitate an MSC as a consequence of almost any relationship, even those that might be unintentional.
Amendment No. 41 would replace “involved with the company” with the words:
“regularly involved with all or most aspects of running the company on an ongoing basis”.
 The “ongoing basis” element of the amendment is incredibly important. Someone beginning a contracting career or starting a new contract significantly different from their last one might have a huge amount of additional requirements—for accountancy, legal and financial advice, recruitment, new invoicing formats and time scales, new requirements for different tax returns and the practical advice that I mentioned earlier. If it is an overseas contract, assistance might be needed with accommodation and visas. Whether the recruitment agency or managed service company is a preferred supplier to the employing company or not, it might be retained to provide additional services over and above the services that might be allowable under the schedule or with the Government’s amendments.

Adam Afriyie: The hon. Gentleman is making some good points that are deeply relevant. Does he share my concern that, as highlighted by the e-mail that my hon. Friend read a moment ago, people with learning difficulties, such as dyslexia, and all sorts of other difficulties would choose the route that he sets out because it is an easier way for them to navigate through the tax system, rather than having a separate accountant and legal adviser and trying to do it all themselves?

Stewart Hosie: I have been in the self-employed sector, too, and retained an accountant to do that work, and it is much easier to use a managed service company or an accounting service company. It is worth reflecting on the point that the self-employed contracting route is taken by many individuals to get into proper business when they do not want to—or cannot—raise the funds to recruit people initially. If it succeeds, they prosper and the money that they make—the rewards can be higher if they have taken the risks—is a good route into becoming a proper business that employs people. People go down that route for many reasons, most of which are honest and fair.
 Amendment No. 42 suggests that MSC definitions must exclude reference to any other companies that an MSC might be involved with. My reading of that, and of the Bill, is that that must apply or else proposed new section 61B(2)(a) would catch legitimate recruitment companies if they were an associate of the MSC provider. They might also be caught by the influence clauses in proposed new section 61B(2)(b) and (c), particularly that which regards influence over the provision of services. If a recruitment firm is a preferred supplier to a company and that company requires a particularly skilled individual, the recruitment agency might say, “Well, we have this person for you but we cannot provide him for two or three weeks a month for two months.” In that sense, it would be directly influencing the provision of the service. It could also influence how payments were made, under instruction from the contractor or by offering advice to the contractor, by saying that it was better to invoice and be paid weekly, fortnightly, monthly, three-monthly or whatever. That is a direct influence on the way in which payments are made and would allow the companies to be caught under proposed new section 61B(2)(c). The influence clauses are far too wide.
 There is an exemption in proposed new section 61B(4). However, it applies only if a company’s business consists “only of placing individuals.” However, if advice is offered to a contractor in addition, such as, “Go to company A rather than company B because they always pay well and they pay on time”, or “Go to company C rather than company D because our experience is that the contract is likely to be extended”, the provision of that advice would breach the definition of only placing individuals with a third-party company and those companies would be caught. Let us think about the consequences, on which I hope the Minister will comment. An individual contractor might have a relationship, possibly with a prime adviser or principal adviser, and certainly with his or her bank, and as they were not providing legal and accountancy services and were certainly not providing a recruitment service or the service of only placing an individual, they might also be caught.
Amendment No. 43 refers to a new subsection and amendment No. 44 excludes legitimate recruitment firms by exempting them from falling into the facilitating trap of proposed new section 61B(1)(d), which I have described. Amendment No. 45 extends the description of support activities, which is a useful description of professional services and so on. That may have to go a little further, but the amendment at least extends the protection to some extent. Amendment No. 46 describes the key activities that one would expect in new subsection (3A) but it, too, may need to go a little further. I hope that the hon. Lady will explain a little further the issue addressed in amendment No. 47, which is on partnerships. I did not see a particular issue in that regard, but I may well have missed it.
Amendment No. 48 deals with the calculation of the deemed employment payment. Should I have this wrong, I would be open to correction, but I understand that it would change the calculation of the money that a worker receives; it would involve proposed new section 61D(1)(b) but would exclude proposed new section 61D(1)(c), other than in respect of the commission fee that an agency would receive. It would not take into consideration any of the elements of the real earnings of the contractor, which is what I believe it is meant to do and which strikes me as correct. Amendment No. 49 is in the next group, and I shall not discuss that.
There are a number of weaknesses. The first part that we are discussing—the definition of MSCs, the exemptions and how people might be caught—is too wide. I have examined Government amendmentNo. 97. If I read it correctly, it will remove some of the safeguards offered by proposed new section 61B(4), because should an individual do anything in relation to 61B(2), which relates to influencing the provision of services, they may be caught. Government amendment No. 97 reduces and weakens the safeguards in an unintentional way.
I have described the issue of a preferred supplier influencing the provision of service. I hope that Ministers will examine Government amendmentNo. 97 and convince me that I am wrong, but I suspect, having read it any number of times, that it weakens the safeguards in an unintentional way.

Colin Breed: It is a privilege to follow the hon. Gentleman, who clearly brings a wealth of personal experience to a complex area of policy. The Liberals support the principles behind clause 25 and schedule 3, but share many of the concerns expressed. The amendments are valiant attempts to address some of those concerns, but perhaps they do not go as far as will be necessary to allay fears that are shared by a considerable number of people both inside and outside the House.
The amendments principally address the employed/self-employed area, which has become much blurred in recent times. I must profess a certain dÃ(c)jÃ vu because of the exchanges that we had on IR35 in previous Finance Bill debates. When IR35 came out, I, perhaps like a number of hon. Members, had a few constituents writing and telephoning me, although that has gone away in recent years. It may be that the professionals have found other ways of addressing some of the concerns, which is perhaps why we are in this situation. 
Let us consider whether or not IR35 was successful. Presumably it has not been so successful—why else would we be confronting some of the proposals in schedule 3? Many hon. Members have mentioned that in any anti-avoidance legislation it is essential to try to target the proposals properly, so as to reduce the number of people or businesses that might be included despite their being perfectly respectable and honest in their transactions and despite their managing their businesses perfectly properly. It seems to us that there is a distinct danger of the measure drawing the net so wide as to include a considerable number of businesses and people whom we would not wish to catch.
Many of the problems seem to relate to the definitions and tests. Surely one of the most important aspects of legislation is to try to ensure that the definitions, terminology and tests are as exact as they can be. However, I am afraid that some of the terminology and proposed wording does not provide that directness and clarity.
 It is also important not to create excessive administrative costs or disproportionate penalties. The unintended consequence of much in schedule 3 could be excessive administrative costs for people who, frankly, should not have to face them and businesses having to make considerable changes to their administrative procedures. The penalties that can be exacted upon businesses could sometimes be disproportionate to both the amount of business that they do and the degree of actual control that they have over their clients’ businesses.
I have some sympathy for the Government in trying to tackle a difficult issue. The amendments that the hon. Member for Chipping Barnet and Conservative Members have tabled have been helpful, in the main, in trying to narrow down how we tackle the problem, as have the Government’s amendments, although I take what the hon. Member for Dundee, East said about the possibility of their doing the reverse. That perhaps serves to demonstrate the complexity of the situation. Is the wording adequate to bring into being something that will address exactly what we all want to address, or will its openness to different interpretation create only confusion?
It is also important to be clear about the exclusions and exemptions. I find that a difficult area, because some of the businesses affected are hybrid businesses, offering a range of services. The experiences of business people, even at this early stage, give a powerful demonstration of the effects on businesses. Indeed, I suspect that there will be an effect on many other businesses throughout the country.
Perhaps the most unclear area, as well as the one with the greatest potential to cause disputes, is that of the unpaid liabilities rules. When I first read the provisions, I almost could not believe what I was reading. The idea of businesses being responsible for unclaimed and unpaid tax seems quite incredible in its potential reach. Although I accept that far too many businesses and organisations organise themselves so as to avoid tax and then to make it unclaimable, trying to move the process into other areas is fraught with dangers. The proposals are far too widely drawn. Many innocent people could find themselves caught up in something that the Government did not intend, yet the courts might decide otherwise.
 As I have said, there are great difficulties and dangers in the future. I suspect that there will be great anger if the proposals go through as drafted with no further amendments. I can foresee many difficult situations and discussions between HMRC, and businesses and other organisations. It is right, of course, for the Government to tackle avoidance. However, the provisions need to be properly targeted to ensure that we do not impose excessive administrative costs. We need somehow to provide clarity of operation for something that I suspect will be strongly opposed by certain elements, particularly those who have perhaps already benefited from organising their businesses so as to avoid paying tax and national insurance.
We on these Benches support the principles behind the proposals, but I remain to be convinced that sufficient time or care has been taken to address the obvious deficiencies and inadequacies, such as the ability of those affected to amend their payroll procedures and change their paperwork. Only time will tell whether schedule 3 will be a success or as much of a failure as the ill-fated IR35. I feel that we may be in for another bout of dÃ(c)jÃ vu in one year’s time, and the year between now and then may be a period of considerable misery for many people.

John Healey: We have had a detailed debate, and concerns have been reflected from a range of interest groups and individual companies that either may be or feel that they may be affected by the proposals. The hon. Members for Chipping Barnet, for Dundee, East and for South-East Cornwall consistently urged us to aim for clarity and certainty, as the provisions intend to, and to minimise the unintended impacts as far as we can.
In the spirit of the detailed points that have been put to the Committee, I hope to provide a detailed exposition that will reassure the hon. Member for Chipping Barnet and other hon. Members who have contributed. I appreciate the hon. Member for South-East Cornwall saying that he had “some sympathy” with the Government over the task that we face, and I welcome his saying that we are right to tackle that area. 
The amendments relate to the schedule, which introduces measures to deal with the problem of managed services companies. When the Committee of the whole House debated clause 25, I described in detail the problem that we face, but it is worth reminding Committee members why action is necessary. I hope the Committee agrees that the Government are right to be concerned and to take action in that area, even if we may differ on whether the provisions are quite right and quite clear enough.
Our problem is that managed service companies are corporate structures through which workers provide their labour services. Those mass-marketed schemes are promoted on the basis that the worker will pay less tax. As a shareholder in the company, the worker is normally paid a combination of salary, at the level of the national minimum wage, and dividends, on which a lower rate of income tax applies and on which no national insurance is paid.
In the vast majority of cases, as HMRC’s compliance work has confirmed, the nature of the worker’s engagement with the end client is equivalent to one of employment. The hon. Member for Chipping Barnet alluded to the current rules—the intermediaries legislation, more commonly known as IR35. They mean that the amounts of tax and national insurance that should be paid on income from such engagements are computed on the basis that they are employment income. However, in most cases, the rules are not followed, and there is a considerable loss to the public purse. The action that we propose, however, is not just about the loss of revenue.

Theresa Villiers: My anxiety over what the Economic Secretary has just said about the old IR35 rules is his statement that they are not enforced properly. What evidence does he have for that statement?

John Healey: I did not say that they were not being enforced; I said that they were not being followed. I also said that we are confronting mass-marketed schemes for which the IR35 legislation proves inappropriate and inadequate.
Members will accept that the Treasury is right to be concerned about lost revenue, the impact on the public purse and the shortfall that must be made up in other ways. However, the issue is not simply about lost revenue. The measures aim to deal with the unfairness that, as businesses have told us, those who follow the rules and pay the required tax and national insurance contributions are being undercut by those who do not apply the rules correctly. There are concerns—Committee members on this side will be conscious of them—that some workers are encouraged or even forced to use managed service companies without understanding that they might, at the same time, be losing some of their employment rights. Although this legislation does not deal with employment rights, by removing the tax incentive for using MSCs and, therefore, reducing the likelihood of mass-marketed schemes, it makes it less likely that employees will enter such schemes without understanding the implications for their employment status and their employment rights.
The hon. Member for Chipping Barnet suggested in the Committee of the whole House and again this afternoon that IR35 had somehow failed. That is not true. However, it is true that the IR35 legislation was not designed to deal with mass-marketed schemes on the present scale. The contract-by-contract approach of the legislative test makes it very resource intensive for HMRC to police, so this Bill introduces targeted action to tackle the wider problem.
The legislation defines MSCs and applies income tax on the basis of the amounts of employment income of MSC workers. In due course, national insurance contributions will also be charged on that income, although that cannot happen until the Bill has Royal Assent. It also tackles the problem of MSCs escaping payment of PAYE debts.
 It is worth pausing and stressing—in case Committee members have not been following the matter very closely since the pre-Budget announcements in December last year—that consultation on the legislation began last December. Many of the responses at that time recognised the problem of MSCs and the need for the Government to act to deal with them. It is clear that it will be a challenge to achieve what is, I hope, a common goal—protecting the Exchequer from those who want to bypass the rules for paying income tax and national insurance, while ensuring that the legislation is focused specifically at the abuse that it aims to tackle. I hope that the Committee will accept that, with the constructive input of those involved in the consultation throughout, we are going to achieve that goal with schedule 3, and that the amendments proposed by the hon. Lady are either unnecessary or would undermine the intent or application of the provisions that we want to introduce.
I reassure the Committee that we are doing all that we can to deal with the legitimate concerns that have been raised with us. No one would dispute that the consultation has been thorough, that it has involved a wide range of industry experts and interested parties or that the Government have listened to the concerns and suggestions. We have made appropriate amendments, where we think them right. The legislation has been significantly revised since it was published for consultation in December.
 Since the publication of the Finance Bill, dialogue, consultation and discussion with industry has continued. Officials continue to meet the representatives of accountants, tax advisers, businesses and employment agencies, among others. The comments of Marcia Roberts, chief executive officer of the Recruitment and Employment Confederation, help to underline the consultation process that we have been trying to conduct. In response to the Budget announcements, she said:
“The Treasury is right to tackle abuse within the MSC market...We welcome the new definition of an MSC, which we have worked closely with the Treasury on...there were very real concerns that the legislation would adversely affect the flexibility of the UK labour market...We are delighted that the Treasury has taken our concerns on board.”
It is precisely because the Treasury and the Government are keen to consult fully that the regulations that will flow from the schedule are not provided to accompany the debate. The draft regulations on the PAYE debt transfer were published for consultation on 8 February, and the consultation closed on 30 April. I think that hon. Members will agree that we should consider the comments fully and in detail before proceeding. As was explained in the letter of 9 May that the Chief Secretary wrote to you, Mr. Illsley, your co-Chair, Mr. Gale, and Opposition Front-Bench spokesmen, copies of which have been made available to the Committee, we have committed to publish the PAYE and national insurance regulations next month, which we will lay before the House when the Bill has Royal Assent.
Before I turn to the detail of the amendments, I want to reiterate to the Committee the significant amounts of tax and national insurance that are at stake, and the scale of the threat to the public purse. Given the sharp growth of MSC schemes in recent years, we estimate that the measures in the schedule and its associated clause could take revenue of £350 million in this year alone.
 Our starting point, which has formed the core of much of the debate today and in the Committee of the whole House, is the definition of an MSC. There is, understandably, much concern that there could be collateral damage to those who are genuinely in business on their own account, and that there might be increased burdens on them. There are also concerns that people to whom the proposed legislation is not intended to apply will be caught by the measures. I hope that we can remove some of the many misunderstandings and that I can provide some certainty for members of the Committee and the businesses that have made representations. I give the undertaking that further guidance on the legislation will be produced by HMRC next month, and HMRC will consult informally with interested parties to ensure that the guidance gives the necessary clarity that those groups seek.
 The definition of an MSC in the draft legislation published in December focused on who controls the company. As was discussed in the Committee of the whole House, not least by the hon. Member for Falmouth and Camborne, the subsequent response from MSC providers made it clear that they were determined to get around the new definition. They rapidly made MSC workers the directors of new companies to give the impression that those workers were in control of those companies. Many people who responded to the consultation pointed that problem out to us, and it became clear that a tougher, clearer and stronger definition was needed. The definition in schedule 3 is a response to those calls in the consultation and to the actions of MSC providers who tried to get around the definition that we proposed in December.
 Proposed section 61B(1) sets out the four conditions that must be met for a company to be defined as an MSC. They are, in summary: that the business consists wholly or mainly of providing the services of an individual to others; that payments made to the individual are equal to the greater part or all of the consideration for the provision of the services; that the way in which those payments are made would result in them receiving, net of tax and national insurance, an amount exceeding that which they would have received if the payment were employment income; and that an MSC provider is involved with the company.
Amendments Nos. 38 and 39 seek to change the third of these conditions. We have deliberately framed the provisions in a way that is not time specific or time related so that each payment must be considered as and when it is made. These amendments seek to apply the criterion on an annual basis, which would have the effect that consideration of whether a company is or is not an MSC could only be made on an annual basis at the end of a tax year.
There is no justification for these amendments and I hope to explain why they would be detrimental to the intent of the legislation. The hon. Member for Chipping Barnet may have adopted this from the intermediaries legislation, but the approach that we are taking in this Bill is deliberately different. Under IR35, the terms of engagements are considered after the end of the year on the basis that many may not be within IR35. By contrast, the Bill deems all income received by a worker by means of an MSC to be employment income. As such it is liable to the deduction of PAYE when received. There is no reason to wait until after the end of the tax year to make that judgment. If the amendments were adopted, there is a risk that the flow of PAYE to the Exchequer could be impeded.
Turning to the fourth of the conditions in proposed new section 61B(1), it is essential that this subsection is read carefully and in its entirety. It may be that we keep coming back to the point that I wish to make now. Proposed new subsection (1)(d) states that a company is an MSC provider if
“a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals...is involved with the company.”
 The first element that must be satisfied is that a person is carrying on a business of promoting or facilitating companies to provide the services of individuals, not a business to promote or facilitate companies generally. For that reason, those promoting or facilitating companies generally—for example, company formation agents—are not MSC providers. The same would be true of training providers and a number of companies that may provide advice.
Some have asked whether a person who promotes their business and who provides services to those working through service companies is an MSC provider. The answer is no. There is a clear distinction between a person who promotes themselves or their business and someone who is, as a business, promoting the use of companies to provide the services of individuals. Even if a person fulfils the criterion of being an MSC provider, it does not automatically follow that their client companies are MSCs. That depends on the nature of their relationship with their client companies—namely, whether they are involved with the client companies. The word “involved” is separately defined in the legislation and I will say more about that in a moment as it was another concern.
Amendments Nos. 40 and 41 relate to the fourth condition set out in proposed new subsection (1)(d). If they became part of the Bill they would undermine its effectiveness by giving MSC providers the opportunity to sidestep the definition of an MSC provider while providing no additional safeguards for those merely providing accountancy services. Amendment No. 40 would bring into the definition of MSC provider the condition that the activity was their “sole or main business”. Our legal advice is that the Courts may well interpret the term “main business” as more than 50 per cent.
For those determined to sidestep the definition—we have seen ample evidence of that since we published our draft proposals in December—it is not beyond the bounds of possibility that an MSC provider would seek to run a dual business of which the provider element consisted perhaps of only 49 per cent. For the same reason, therefore, the word “sole” would provide even greater scope for circumvention. Similarly, substituting “promoting and facilitating” for “promoting or facilitating” would enable MSC providers to circumvent the definition of an MSC provider by splitting the two constituent elements of their business. The association rule, as some might describe proposed new section 61C(4), which seeks to counter the splitting of a business, would not be effective in that situation because in order for it to apply there needs to be an MSC provider before there can be an associate.
I am afraid that amendment No. 41 would also undermine the effectiveness of the legislation. First, it would include in proposed new section 61B(1)(d) a description of an MSC provider’s relationship with a client company, which is set out already in proposed new section 61B(2). I think hon. Members can appreciate that that structural change would simply confuse those attempting to interpret the legislation and, potentially, could mislead courts when they come to construe it.
Secondly, and perhaps more importantly, we are looking for greater certainty and clarity, but the amendment would introduce what I am sure most hon. Members would accept is a rather vague concept of
“most aspects of running the company”.
Those terms, allied to the proposed inclusion of the word “regularly”, again would give MSC providers ample scope to challenge a claim that they did not fit the criteria or to sidestep them in the first place.
The hon. Lady raised a serious concern about tainting, as she put it. I think that that is what led to amendment No. 42, as she explained to the Committee. My concern is that the amendment is not necessary or helpful and could undermine the intent of the legislation. I understand from what she said that it would ensure that an MSC provider’s other client companies with which it is involved are disregarded when determining whether an individual company is an MSC. To a large extent, the legislation does that already by virtue of proposed new section 61B(1). Specifically, proposed new subsection (1)(d) refers to the MSC provider being “involved with the company”. That links directly to the opening words in proposed new section 61B(1), which reads:
“A company is a “managed service company” if—”.
We are aware, however, that MSC providers seeking to circumvent the legislation will claim that each relationship with their thousands of client companies is unique and does not constitute being involved. Let me try and be clear about how HMRC will approach this. First and foremost, it will look at the nature of the product provided by an MSC provider. Where it is clearly a standardised product constituting the MSC being involved with client companies, it will take the starting view that all client companies are MSCs. The onus will then be on the individual companies to demonstrate no involvement.
If the amendment were adopted, it would risk undermining the legislation because in determining whether a person is an MSC provider it is necessary to look at the nature of their business. Clearly, to do that it is necessary to look at the services provided by the clients more widely. There is the risk that an MSC provider would seek to challenge the assertion that it is carrying on a business of “promoting or facilitating” by arguing that in determining the nature of its business, HMRC could not consider the nature of the services offered widely. Clearly, that could constrain HMRC unduly and could undermine the effectiveness of the legislation.

Adam Afriyie: Will the Financial Secretary make some observations about an MSC changing its behaviour by relocating overseas? Is there a possibility that the tightening up of the regulations, or the introduction of this legislation, would perhaps drive some of these businesses to operate overseas?

John Healey: I suppose, particularly in this day and age, that many companies of many types may consider the question of their national base. I see no reason why this Bill should lead to that response from MSC providers, but clearly there may be MSC providers that consider such a move as part of their business planning.
I mentioned a few moments ago the question of the definition of “involved” and that is an important point.
 Mrs. Villiers rose—

John Healey: I am happy to move on to my next point, which the hon. Lady is concerned about, or I will give way if she wants to pick up on previous points.

Theresa Villiers: Amendment No. 42 is about tainting and the provision that one should not have regard to the scheme provider’s relationship with other companies. If the amendment were adopted, it would not stop HMRC from examining the general business of the scheme provider, assuming that other amendments were not accepted. It would still be open to HMRC to examine whether the scheme provider was in the business of promoting or facilitating the use of companies. It would be possible to examine the general nature of the product offered by the scheme provider under proposed section 61B(1)(d), even if my amendment, which would solve the tainting problem, were to be adopted.

John Healey: That is not the view that we take of the impact of amendment No. 42. As I think that I have explained to the Committee, the risk is twofold: first, the amendment would give grounds for the MSC provider to sidestep or challenge the assertion that it was carrying on the business of promoting or facilitating; secondly, in determining the nature of the business, which is clearly one of the factors that HMRC would have to take into account, the amendment may prevent HMRC from considering the nature of the services that are offered more widely, because it may constrain HMRC simply to examining the specific company.
Turning to the question of involvement, proposed section 61B(2) sets out five tests of involvement. If one of these tests is met, the company is an MSC. It is important to emphasise that this measure needs to be considered only if there is an MSC provider. For example, a tax adviser providing tax advice is not an MSC provider and therefore the tests set out in proposed section 61B(2) are not considered.
The five activities defining “involved” go beyond the services provided by accountants. Some have suggested that the word “influences” in proposed section 61B(2) captures all the advice given by accountants and advisers, but there is a distinct difference—I think that hon. Members would accept that there is a difference—between a person who provides independent, tailored advice to a client, who is then able to consider that advice before accepting it or rejecting it, and the person who simply supplies a client with a standard solution or product that the client accepts. It is not the intention that the former situation—the provision of advice—be considered to be influencing in this context. However, the latter situation—supplying a standard solution or product—is regarded as influencing.
I hope that my statement on this matter—I recognise that it has been a matter of concern—will help to provide clarity and reassurance to those who are interested.

Theresa Villiers: The Financial Secretary is generous in giving way and I appreciate it. However, I draw his attention to the point that I made in my remarks on proposed section 61B(2)(d), that one “influences” if one
“influences or controls the company’s finances or any of its activities”.
People do not engage accountants and pay them fees unless they expect them to influence their company’s finances or its activities. Otherwise, why have an accountant?

John Healey: I thought that I had been quite clear. In the majority of situations where concerns have been expressed to us, this measure becomes relevant only if the company is an MSC provider. In other words, as I tried to explain, it is only if an MSC provider is established that the provisions and questions around the word “involved” apply. In the vast majority of examples, that will not be the case.
 Let me turn to new section 61B(3) and reinforce the fact that a person who merely provides legal or accountancy services in a professional capacity is not an MSC provider involved with their client. There is a specific exclusion—this is the point about which the hon. Lady is concerned—from subsection (1)(d) for those who provide such services. Let me try to make this absolutely clear: even when the specific exclusion does not apply, the purpose of the legislation is not to include within the definition of MSC provider accountants, tax advisers, lawyers and company secretaries who provide advice or other professional services to companies in general. Those persons are not in the business of promoting or facilitating the use of companies to provide the services of individuals, nor are they regarded as involved with the company in the way in which the legislation envisages.

Theresa Villiers: Will the Financial Secretary give way?

John Healey: Perhaps I could just give this example, as it might help the hon. Lady. When an individual asks a tax adviser for help or advice in setting up a business to provide that individual’s services to end users, the tax adviser considers the individual’s position and might recommend a corporate structure that includes the payment of dividends to the individual as a shareholder worker. The tax adviser is not acting as an MSC provider.

Theresa Villiers: I am grateful to the Financial Secretary. Let us take a different example, where an accountant specialises in giving advice to freelance workers and contractors. Day in, day out, contractors come to that accountant to get advice on the best way in which to run their business. The accountant regularly sets up companies and carries out services in relation to them. Do they not fall within the scope of paragraph (d), so that there is a danger that they might be construed as being in the business of promoting or facilitating the use of companies to provide the services of individuals?

John Healey: Freelancers or agency workers who are engaged directly by any agency or who are in some way in business on their own account and run their own affairs, either through a personal service company or some sort of umbrella company, are simply not affected by the legislation. Only those freelancers or agency workers who operate through managed service companies will be affected by the changes that we propose.

Stewart Hosie: On that point—it is my main concern—when one considers new section 61B, which defines the meaning of a managed service company, one could easily come to the conclusion that a normal recruiting company or accounting services company with a recruitment element would fulfil all the criteria in subsection (1), whether it was wholly or mainly providing people or whether payments were made in a certain way or were of a certain size. It would certainly be promoting the business as if it were an MSC, particularly in its involvement with companies, as I have described. I am still not sure that the safeguards will be there for legitimate recruitment companies. I have not heard anything to tell me that they will not fall into this category and be punished in a way that I think is unintentional.

John Healey: If the hon. Gentleman will allow me, I shall come to employment agencies and recruitment companies in a moment.
 Amendments Nos. 43 to 46 appear to intend that the exclusion for the provision of accountancy and legal services should apply to the tests of involvement under proposed section 61B(2) as well as the definition of an MSC provider. It is the Government’s view that they are not necessary. As I have said, the tests of involvement are considered only if proposed section 61B(1)(d) applies in its entirety, so only in the case of
“a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals”.
Amendments Nos. 45 and 46 attempt to expand and clarify the scope of the exemption for the provision of accountancy and legal services in a professional capacity. The difficulty with amendment No. 45 is that it would undermine the legislation. Far from providing clarity, the terms that it would add, such as “services of a nature” and “including”, would simply render proposed new section 61B(3) of the 2003 Act so ambiguous that many MSC providers would arguably claim that it exempted them. The reference to company secretarial services is also unnecessary, since generic services such as those and company formation do not fulfil the criteria that we have set out in proposed new section 61B(1)(d), as they are not in the business of
“promoting or facilitating the use of companies to provide the services of individuals”.
Amendment No. 46 sets out a list of what accounting services might include and provides for the Treasury further to provide a list of such services by affirmative resolution. My judgment is that the services listed will not help to tackle what we are trying to tackle and would not be necessary. The reason for coming to that conclusion is as follows. To reiterate, proposed new section 61B(3) explicitly excludes certain categories of persons providing certain services from the scope of proposed new section 61B(1)(d). Those providing the type of services listed in amendmentNo. 46 would already be excluded, either explicitly, by virtue of proposed new section 61B(3), or because they are not in the business of an MSC provider as set out in proposed new section 61B(1)(d).
I apologise to the Committee for a mistake in the explanatory notes, which we published on 29 March. The note on clause 25 and schedule 3 contained an error in paragraph 24, which provides the explanation of proposed new section 61B(3). The error was helpfully pointed out to us by a lawyer from one of the representative bodies—not by my hon. Friend the Member for Wolverhampton, South-West, although I am sure that he would have spotted it and been on his feet anticipating my remarks if he was in Committee this afternoon. Unfortunately, the original note misquoted the text, by referring to the
“business of promoting and facilitating”,
rather than the
“business of promoting or facilitating”.
Clearly the hon. Member for Chipping Barnet also spotted that. Just to reassure the Committee, we have amended the explanatory notes on our website, although we have not published a new printed version.
 Before turning to some other points, I should like briefly to mention Government amendment No. 97. I said in the Committee of the whole House that employment agencies and businesses have an important and legitimate role to play in the temporary labour market and we would not want to disrupt that. To ensure that employment agencies are not caught by the definition of MSC provider, we have provided an exclusion in proposed new section 61B(4). However, given the potential for MSC providers simply to re-badge themselves as employment businesses or agencies, the exclusion in proposed new section 61B(4) was restricted, to the extent that employment businesses and agencies do no more than would be expected from such businesses.
Our amendment No. 97 corrects a technical flaw in the legislation, which, if left unchanged, would have resulted in the exclusion being too narrow and therefore bringing employment businesses back within the scope of the definition, which was clearly not our intention. Our amendment will allow an employment business or agency to influence a worker’s company or its finances to the extent that that relates to the placing of the individual with an end client. That will mean that such businesses can carry on their normal activities, as intended.
I hope that I have been able to make it clear to the Committee that the measures have been subject to detailed and constructive consultation. Underpinning our work has been a clear consensus that action is needed to tackle the problems identified. The Committee has been indulgent this afternoon. I hope that what I have said is helpful and will bring a degree of certainty and clarity about who falls within the scope of the legislation, which I recognise is important to businesses involved in the sector.
 I hope that I have also explained why the amendments and arguments put forward by the Opposition would not improve the certainty of the legislation in most cases, and in some cases would cause greater confusion and more scope for circumvention. I hope that the hon. Member for Chipping Barnet will not press the amendment, but if she does, I shall have to ask my hon. Friends to oppose it.

Theresa Villiers: I remain concerned about the proposals. As I said from the outset of the debate on schedule 3, the Opposition would support appropriately targeted attempts to deal with what is a genuine problem. Regrettably, the Financial Secretary is not prepared to accept any of our amendments. I am not convinced that what he said about the restrictive scope of paragraph (d) will be reflected in a court decision in two or three years’ time, for example.
I do not think that there is sufficient certainty, as we still have not heard enough of an explanation of what “promoting and facilitating” involves. All we have heard is that someone producing a standardised product for the use of freelancers and contractors is likely to be caught by the provisions, but people whose services are more tailored are not. I remain concerned about tainting; I do not believe that the amendment that I tabled would have the negative consequences that the Financial Secretary suggested it would. I wish to press amendments Nos. 40 and 41 to a Division. I do not propose to press amendment No. 38. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 40, in schedule 3, page 90, line 21, leave out from “person” to “the” in line 22 and insert:
“whose sole or main business is the provision and facilitation of”.—[Mrs. Villiers.]

Question put, That the amendment be made:—

The Committee divided: Ayes 11, Noes 17.

Question accordingly negatived.

Amendment proposed, No. 41, in schedule 3, page 90, line 23, leave out ‘involved with the company’ and insert:
“regularly involved with all or most aspects of running the company on an ongoing basis”.—[Mrs. Villiers.]

Question put, That the amendment be made:—

The Committee divided: Ayes 11, Noes 17.

Question accordingly negatived.

Amendment made: No. 97, in schedule 3, page 90, line 40, leave out from ‘services);’ to end of line 42 and insert—
‘(5) Subsection (4) does not apply if the person or an associate of the person—
(a) does anything within subsection (2)(c) or (e), or
(b) does anything within subsection (2)(d) other than influences the company’s finances or activitiesby doing anything within subsection (2)(b).’.— [John Healey.]

Theresa Villiers: I beg to move amendment No. 49, in schedule 3, page 95, line 45, at end insert—
‘61K Implementation, investigation and enforcement
(1) The provisions of this Chapter may be administered and enforced only by officers of the Revenue and Customs acting with the authority of the Commissioners for Her Majesty’s Revenue and Customs.
(2) A certificate of the Commissioners for HMRC stating that an officer of Revenue and Customs has authority to act under this Chapter shall be conclusive evidence of this fact.’.

Eric Illsley: With this it will be convenient to discuss the following amendments: No. 82, in schedule 3, page 96, line 9, leave out
‘an officer of Revenue and Customs considers’.
No. 50, in schedule 3, page 96, line 10, after ‘Customs’, insert
‘, acting with the authority of the Commissioners for Her Majesty’s Revenue and Customs,’.
No. 51, in schedule 3, page 96, line 12, at end insert—
‘(1A) A certificate of the Commissioners for Her Majesty’s Revenue and Customs stating that an officer of HMRC has authority to act under the regulations provided for in subsection (1) shall be conclusive evidence of this fact.’.
No. 52, in schedule 3, page 96, line 16, leave out ‘encouraged, facilitated’ and insert ‘actively encouraged or facilitated’.
Government amendment No. 98
No. 53, in schedule 3, page 96, line 20, at end insert—
‘(2A) No person shall fall within the scope of subsection (2)(c) above unless they knew or should have reasonably been expected to know that the services of the individual were being provided by a managed service company.’.
No. 54, in schedule 3, page 96, line 20, at end insert—
‘(2B) Ordinary employees of the MSC provider shall not fall within the scope of subsection (2). For the purposes of this subsection, “ordinary employees” means employees who are not involved with organising, managing or directing the overall activities of the MSC provider.’.
No. 55, in schedule 3, page 96, line 20, at end insert—
‘(2C) An individual whose services are provided by the managed service company does not fall within subsection (2) unless he knew or should have reasonably been expected to know that his services were being provided by a managed service company.’.
No. 60, in schedule 3, page 96, line 20, at end insert—
‘(2D) A person does not fall within subsection (2)(c) merely by virtue of contracting with businesses who provide the services of individuals to it and which may be MSCs.’.
No. 61, in schedule 3, page 96, line 20, at end insert—
‘(2E) A person does not fall within subsection (2)(c) merely by virtue of carrying on a business consisting only of placing individuals with persons who wish to obtain their services (including by contracting with companies which provide those services); but this subsection does not apply if the person, or an associate of the person, does anything within any of the paragraphs (c) to (e) of subsection (2) of section 61B.’.
Government amendment No. 99
No. 56, in schedule 3, page 96, leave out line 22 and insert
‘services of a nature provided by advisers in a professional capacity, including legal, accounting and company secretarial advice.’.
Government amendment No. 100
No. 57, in schedule 3, page 96, line 22, at end insert—
‘(3A) For the purposes of subsection 3, accounting advice includes, but is not limited to, advice and assistance concerning:
(a) preparation or provision of records, returns, financial statements, reports or financial information concerning accounting;
(b) auditing, insolvency or taxation matters;
(c) communication and representations made on behalf of a client to third parties in matters concerning accounting, auditing, insolvency or taxation.
(3B) The Treasury may by order provide for a non-exhaustive list of professional services which fall within the meaning of subsection (3) and (3A) above.’.
No. 58, in schedule 3, page 96, line 22, at end insert—
‘(3C) In determining the amount sought to be recoveredunder these provisions from any person, regard must be had to the degree of involvement by that person in the activities of the MSC, the running of the MSC or the provision of services of the individual.’.
(3D) Any notice given under this section must include details of all those persons under subsection (2) from whom recovery is being, or has been, sought.
(3E) The Treasury may specify by order the sequence in which categories of persons against whom recovery will be sought under this section.
(3F) HM Revenue and Customs may not pursue persons mentioned in subsection (2)(c) under the provisions of this section unless, in the opinion of an officer of Revenue and Customs—
(a) it is impossible to recover the specified amount from persons mentioned in paragraphs (a) and (b), or
(b) it is impracticable to recover the specified amount from those persons.’.
No. 101, in schedule 3, page 96, leave out lines 35 and 36.
No. 59, in schedule 3, page 96, line 37, after ‘subsection’, insert ‘(3B), (3E) or’.

Theresa Villiers: I apologise for trying to get to this a little prematurely a few minutes ago.
The amendments in this group are broadly focused on proposed new section 688A and the third party debt transfer provisions in schedule 3. There is a concern that they could be used to target the innocent, ranging from end users of contractors to employment business and their advisers. The Committee should be aware that the proposals are powerful. They are more far-reaching, by some measure, than the rules that rendered company directors liable for the debts of their company.
In this regard, I should cite Blake Lapthorn Tarlo Lyons, a firm of solicitors to which I have referred before. It has said:
“This is a fairly revolutionary principle...People are now going to be liable for the tax affairs of their suppliers (i.e contractors) even where those suppliers are clearly self-employed but just happen to fall within the new MSC regime...It is clear that ultimately staffing companies and others who are some way from the day to day affairs of the MSC and not directly interested (in terms of shareholding or profit share) in the MSC, may become liable for the MSC’s unpaid tax and NICs.”
More worrying, it points out:
“Conceivably a staffing company which fails to take appropriate steps may find itself hit by an unprovided for tax bill for as much as 20 to 30 per cent. of its turn-over”.
Ann Swain, the chief executive of the Association of Technology Staffing Companies, described the current situation bluntly, saying:
“There is too much risk...It’s ridiculous.”
She continued by saying that the Chancellor
“is cutting back on the flexibility of the workforce in a huge way.”
It is not an answer for Her Majesty’s Revenue and Customs to say that it will only enforce the provisions responsibly and will not target the innocent. If the legislation is too widely drafted, it must be restricted by statute. It would be unconstitutional to leave the problems identified in relation to proposed newsection 688A to be resolved at the discretion of HMRC.
As I have told the Committee, some legitimate consultants and contractors are finding that their work is drying up because people are so anxious about these provisions that they are becoming increasingly reluctant to deal with any small service companies. The Opposition’s amendments in this group therefore seek to achieve three important goals: to clarify the third-party debt rules; to prevent their being used against innocent third parties who are unaware that they are dealing with an MSC; and to provide important safeguards in the way in which the rules are administered and enforced.
I should like to deal with the timing of the introduction of these proposals. They have proved to be so controversial that their implementation has been postponed from the start date of 6 April that applies to the rest of the legislation. The HMRC website states that the debt transfer provisions come into effect for MSCs and MSC providers from 6 August and for other third party parties on 6 January 2008. As those dates do not appear in the Bill, it would be useful if the Financial Secretary would confirm, as I believe that he did earlier, that those are the appropriate dates. It would also be useful if he would confirm whether or not the clock is already running on tax debts that have accumulated since 6 April? Given what he has said, I do not think that that is likely to be the case, but I know that some people believe that it might well be and clarification would be useful. It would be very unfair if these penal liabilities could be building up now, even though the legislation has not been finalised.
Even assuming that debts can build up only from August or January, the timetable is a short one—it is much shorter than the lengthy run-up to IR35. Unpopular though that measure was, at least people who were affected by it were given a chance to understand what it meant and to adapt their systems to ensure that they were compliant with the new rules that the Government were introducing.
The liabilities will kick in in just two months, yet a major part of the relevant rules—the final draft of the secondary legislation—has not even been published, although we have the initial draft, which appeared in the consultation. It is a matter for concern that the Committee does not have sight of the final draft of the secondary legislation. It would be inappropriate to finalise the secondary legislation before considering the consultation responses, but it would have been useful if the Government had timed the consultation in such a way that it had closed earlier with sufficient time not only for the Government to consider the responses, but to produce the legislation in time for the Committee to consider it.
 Amendment No. 49 focuses on a point of concern raised with me by the Professional Contractors Group, and is linked to amendments Nos. 50 and 51. They are probing amendments to give the Committee the opportunity to discuss the approach that might be taken by tax inspectors with limited expertise or experience in this technical and specialist area. They seek to ensure that the managed service company provisions are enforced and administered by specialist units at HMRC. I understand that HMRC has indicated that that will be the case, and I think it is important to ensure that those involved with enforcement of the provisions have appropriate training and understanding.
The PCG has made representations that the enforcement of IR35 has often been problematic and that cases have often been withdrawn by HMRC after lengthy wrangling when they were passed from local inspectors to specialist units. It seems to be under the impression that it is fairly common for non-specialist local inspectors to make errors in the difficult task of implementing IR35, and it has justifiable concerns that that might happen with the new legislation, which, as we have heard from this side of the House, is difficult to understand. PCG members certainly feel that local inspectors have not always understood IR35 correctly, and giving statutory backing to the commitment to use specialist enforcement in this area could reduce errors, as well doing something to promote confidence in the new measure.
Amendment No. 82 relates to the term “HMRC considers”. We will no doubt come back to the matter, but it essentially raises the same concerns that many have raised in relation to the term “HMRC thinks” in other parts of the Bill. New section 688A permits sums to be recovered under the third party debt provisions when HMRC considers they should have been deducted by the MSC from payments to workers.
 My concern is that either the law required the sums to be deducted by the MSC, or it did not. The mental processes, views and opinions of what “HMRC considers” should have been done should not be relevant in determining the amount of tax to be paid. I hope that the Minister will consider supporting the amendment to delete “HMRC considers” or at least inform the Committee why the wording in new section 688A(1) is necessary. How will a determination be made of what “HMRC considers” to be the case, and how can that be challenged? Does the Revenue’s opinion have to be based on reasonable grounds, and are there any circumstances in which the tax that HMRC considers to be due is not required to be paid under statute?
Amendment No. 82 reflects serious worries raised by the Institute of Directors, which states in its briefing on the Bill:
“We have a general concern about the underlying attitude, which we see as being one of ‘trust me, I’m a Government official’...It is not easy to square such legislative recognition of the significance of officials’ opinions with the spirit of the Bill of Rights of 1689 or of the standard preamble to a Finance Act, both of which make clear that decisions on who pays what taxes rest with Parliament rather than with the Crown.”
I hope that the Minister will think again about the terms “HMRC considers” and “HMRC thinks” later in the Bill.
 I move to amendments Nos. 52 and 53 and Government amendment No. 98, which address the heart of concerns surrounding the third-party debt provisions that we are considering. The Opposition amendments seek to restrict the wide reach of subsection (2)(c) of proposed section 688A, which imposes liability on any person
“who (directly or indirectly) has encouraged, facilitated or otherwise been actively involved in the provision by the MSC of the services of the individual”.
 Although the relevant issues here are similar to those that we discussed regarding proposed section 61B(2)(d), paragraph (c) of subsection (2) is even broader.
Amendments Nos. 52 and 53 are designed to answer some of the many concerns that have been expressed about the wide-ranging scope of paragraph (c), and should be read alongside amendments Nos. 54, 55,60 and 61, which would provide clarity about the liability of specific groups. Those groups are: the ordinary employees of the scheme provider; the worker in the MSC; the end-client who engages the services of the worker; and staffing and recruitment companies.
 Before I discuss our amendments in detail, Ishould like to make it clear that I welcome Government amendment No. 98 to delete the word “facilitated” from paragraph (c). I am pleased that they have responded to the concerns that I expressed on Second Reading andin the Committee of the whole House about the scope of the third-party debt rules. The Committee has already considered the problems with the concept of facilitation in relation to proposed section 61B, and the issues here are similar. Accountants, company formation agents and even insurance companies might be caught by the third-party debt rules because their activities can undoubtedly facilitate the use of companies to provide the services of individuals.
 In amendment No. 52, I sought to qualify and restrict the scope of the word “facilitated” by requiring active conduct before liability could be established under paragraph (c). It is preferable that the word should be deleted altogether, but that would not solve the problems with the paragraph. The word “encouragement” is still retained in the paragraph, and is, as the Law Society has pointed out, very broad. Its briefing states:
“The focus of the secondary liability rules should be persons who are involved in the management of the activities of the MSC and who make money from those activities. A person who encourages is someone who is on the sidelines rather than someone who is involved in the activity.”
Even with the removal of the word “facilitated”, the Opposition believe that more needs to be done to introduce an element of culpability before liability can be established.
Amendment No. 53, which would insert a new subsection (2A), would remove from the scope of the third-party debt rules people who did not know or could not reasonably be expected to know that they were dealing with a managed service company. The amendment is designed to remove from risk people who have unwittingly been involved with an MSC by requiring deliberate conduct or complicity with the MSC scheme. The Institute of Directors put this point well in its submission, when it said:
“Subsection (2)(c) encompasses too wide a range of people. It means that people could have tax debts passed on to them even without culpability. This is a major departure from the normal principle that people can only be penalised when there is some fault on their part. We regard the failure to include some culpability test as wholly unacceptable, and as reflecting a desire to design a system to suit the convenience of officials. The reference to active involvement does not amount to a culpability test, and no permanent reliance should be placed on any Ministerial or official expression of intent that it will be interpreted as a culpability test.”
 The final point is particularly telling. The word “active” did not appear in the draft section 688A in the consultation document. HMRC added the word “actively” to section (c) to turn “or otherwise been involved” into
“or otherwise been actively involved”,
and seemed to think that that sorted out the culpability problems.
HMRC also seems to believe that it has provided for the element of conscious wrongdoing that was hitherto missing from the measures. I agree that the insertion of the word “actively” is useful—indeed, my amendment No. 52 also uses that concept to qualify not only involvement but encouragement and facilitation—but it is insufficient to inject the element of culpability that is needed if we are not to catch people who are innocent and unaware of their connection with an MSC in the net of the debt transfer rules. That is why proposed new subsection (2A) is necessary. The Committee should note that it would not protect people who deliberately shut their eyes to what is going on, or those who, given the facts that they knew, ought reasonably to have known what was going on.
Let me anticipate some of the concerns that I think that the Minister might express. He might say that importing a knowledge requirement explicitly into the statute could give rise to evidential problems. In response I point out the reference in amendmentNo. 53 to:
“should have reasonably been expected to know”
To a large extent that will deal with such evidential concerns. If a person knew facts that would lead an ordinary person to conclude that they were dealing with an MSC, that will suffice. I point out also that very similar wording appears in other contexts in the law, particularly in section 214 of the Insolvency Act 1986 in relation to directors’ liability for debts of their company. If the courts can cope with that concept elsewhere, they should be able to cope with it in schedule 3.
My second response to resistance to the amendment comes from the Treasury’s own consultation paper, which states that,
“the scope of the provision is limited so the legislation is not intended to include anyone who didn’t know or could not reasonably be expected to know that they are dealing with an MSC”.
That was repeated by the Financial Secretary in a letter to me dated 10 May. If that is the Treasury’s intention, why not make it clear in the statute? If he will not accept that amendment, it is critical that he clarify in Committee what led him to believe that proposed new section 688A as it stands produces the result set out in his letter and the consultation paper. We need a further explanation of the meaning of the statement in the consultation paper and of how the principle that it will establish will operate in practice.
 I shall turn to amendment No. 54, the first of the amendments on different groups affected by the third-party debt rules. As drafted, the ordinary non-director and non-shareholding employees of an MSC provider could be caught by proposed new section 688A(2) as someone who has
“encouraged, facilitated or...been actively involved in the provision by the MSC of the services of the individual”.
For example, a payroll clerk or secretary might well have facilitated or been actively involved, but it seems pretty harsh to hold those people liable for significant sums of money. The amendment is focused on imposing the liability on the controlling minds of the MSC providers, rather than just its junior staff. It would focus the statute and liability on staff members who were actively
“organising, managing or directing the overall activities of the MSC provider.”
Amendment No. 55 raises slightly more difficult issues. It is a probing amendment designed to highlight issues concerning workers operating through the MSC and to get a clearer idea of the circumstances in which a worker might be pursued under proposed new section 688A. The PCG is concerned about that point. It is clear that workers could fall within the scope of the third-party debt rules; they do so explicitly under new section 688A(2)(a) if they are a director or office holder. However, even if they are not, presumably carrying out the work itself would bring them within the remit of paragraph (c) as actively involved in the provision of services via the MSC; providing those services must amount to active involvement.
A concern needs to be cleared up about whether a worker could end up with the tax liability for all the other workers in the MSC. That point was raised with me by the London Society of Chartered Accountants, which is concerned that the provision would enable HMRC to claim PAYE and then NICs from a contractor who had worked for an MSC in relation to all the other co-workers in the MSC. That could lead to significant liabilities for workers, and the society advocates steps to be taken to amend the situation.
I think that the answer the problem might be partly provided in new section 688A(2)(d), where it is required that acts of encouragement and facilitation focus on the activities of “the individual”, not “individuals” or “an individual”, so the liability for a co-worker’s tax debts would come only with encouragement in relation to the provision of their services. However, if one contractor gets other contractors into a particular project, the criteria might be satisfied. So there is a risk, and if the Financial Secretary can eliminate it today, it would be useful.
Even if new paragraph (c) does not mean inevitably that a worker is liable for the tax debts of other workers in the MSC, might the liability be imposed if they were an associate of the company under paragraph (a)? The meaning of “associate” is set out in new section 61I(3) as
“a person connected with the company”
and is defined in section 839 of the Income and Corporation Taxes Act 1988 as someone who has control over the company. A worker can certainly be said to have control over the company in a case in which just one worker is entitled to all the dividends. However, catching the worker on the grounds that he controls the MSC rather contradicts the Government’s assertions that workers in MSCs do not control their own companies. That lack of control and independent operation by the worker is what the Government say that they want to target and stamp out, so it would be useful if the Minister could confirm that workers in MSCs are unlikely to be liable as associates of the company.
Amendment No. 60 is critical. It concerns the end client—the company that engages the services of the contractor. The end client should not be at risk as a result of new section 688A merely by virtue of having hired people who happen to be operating via MSCs. Amendment No. 60 would make that crystal clear by inserting a new subsection (2)(d) with a safe harbour for those who engage the services of contractors. It provides that the end client will not be liable merely because it hires a contractor who is operating via an MSC. Without clarification, it might seem that that conduct is enough to amount to encouragement of the provision of services via an MSC. What could be clearer encouragement to provide services via an MSC than paying the MSC to provide the worker?
 The end client should not have to check details of contract workers’ relationships with their service companies or their professional advisers. Any requirement to do so would significantly disrupt outsourcing in this country and would have a damaging impact on the flexibility of the labour market. There was an extensive debate on that under IR35, and the Government eventually conceded that end clients should not be targeted.
I understand that HMRC believes that inserting the word “actively” in relation to “or otherwise involved” would remove the threat from innocent end clients. However, that would provide very uncertain protection and could be interpreted in a number of different ways by the courts. Given the large liabilities involved, it is vital that the issue be cleared up, preferably by an amendment. Certainly, any clarification that the Minister can give this afternoon will be very much welcomed by those who are affected.
 Amendment No. 61 is designed to clarify the operation of the framework in relation to staff in recruitment companies. We have heard a number of concerns expressed about that. The Institute of Chartered Accountants has raised the point that recruitment agencies could be exposed to liability under new section 688A. Again, I welcome the Government’s attempt to tackle the issue through amendments Nos. 99 and 100. It is a matter of concern that the Bill contains a degree of protection for the recruitment industry in relation to new section 61B, but that that is not repeated in relation to new section 688A. The amendment would address the problem by lifting the wording from proposed new section 61B and inserting it in proposed new section 688A. We have already discussed the concerns raised by the recruitment sector and it is critical that those be addressed.
Amendments Nos. 55 and 56 track the identical amendments tabled in relation to the safe harbour for professionals. We have already discussed those at length, so there is no need to look at them again in detail. However, I would like to raise one point. Can the Minister clarify the difference between the wording here and that in new subsection 61B(3)? Why does the Bill refer to services there but to advice in new section 688A? Advice seems to be a narrower concept than services. Does the Minister anticipate that the safe harbour in new section 688A would have a narrower remit than that in new section 61B? If so, what is the justification for that?
Amendment No. 58 provides for a number of important safeguards in relation to the operation of the third party debt provisions, and amendment No. 59 is consequential. As we have discussed, these are serious and powerful provisions. We therefore need to ensure that they are operated and enforced in a responsible and efficient way by HMRC. We are concerned about the selection of people who could be pursued for the same debt. HMRC might be tempted to go for the low-hanging fruit—the easiest target. The amendment suggests a number of new subsections to deal with that concern.
New subsection (3C) seeks to make it clear that there is an obligation on HMRC to take a proportionate approach when using the third party debt provisions. It should be explicitly acknowledged that not all parties potentially in the frame under the Bill are equally culpable. It is to combat the deliberate winding-up of companies to prevent recovery by HMRC that these provisions have been drafted. This type of deliberate conduct should be taken into account in making decisions on enforcement. Those who are unwittingly caught by the legislation should not necessarily receive the same treatment as these deliberate evaders.
 New subsection (3D) provides that if someone is being pursued for a debt under section 688A, they should know the other parties from whom HMRC is taking steps to recover the debt. That seems to me a matter of fairness. If HMRC wish to go for a scattergun approach and pursue several people, it seems only fair that their targets should be made aware of the other relevant parties and the sequence in which they are being pursued.
 Turning to new subsections (3E) and (3F), again I have received representations from the PCG on the matters covered and the sequence in which parties will be pursued under section 688A. The informal indications from HMRC seem to be that the MSC will be approached first, then its directors or office holders, then the scheme provider and finally others who are actively involved in the provision of services via an MSC within paragraph (c). The amendment is designed to draw out the Minister to make some formal comment on the approach that HMRC will take and the order it will adopt. Will there be any formal sequence? If so, what will it be?
 Rule 97B(6) of the draft secondary legislation provides for a restriction along the lines set out in paragraph (3F). Third parties liable under paragraph (c) will be pursued only if the debt proves irrecoverable from the MSC provider or its directors. However, the draft secondary legislation would override this sensible restriction on HMRC by adding a get-out clause that the sequence set out can be set aside if the protection of the Exchequer would be prejudiced. The amendment provides the opportunity to hear from the Minister what this restriction would involve and why he feels it is necessary to include it in the secondary legislation.
 Last of all I should like to comment on amendment No. 101, which deletes the Treasury’s power to amend section 668A by secondary legislation. In a number of amendments I have suggested that the Treasury should have the power to look at particular aspects of the legislation that we are discussing, but it is a matter of concern, given the seriousness of these provisions, that HMT can have the unfettered power to amend primary legislation using secondary legislation. Given the significant liabilities and harsh nature of the provisions, I believe that if the Government wish to amend section 688A, they should bring forward primary legislation to bring that about.

John Healey: This is a large group of amendments. I will concentrate most of my remarks on those that reflect the greatest concern and are therefore central to the Committee’s consideration. I hope that I can offer some further reassurance and clarity to the Committee and to those with an interest in the Bill about how it will operate in relation to MSCs.
I shall deal first with amendments Nos. 49 to 51, which deal with the implementation, investigation and enforcement of the provisions. These amendments seek to require that the measures we set out in schedule 3 should be administered and enforced only by officers of HMRC, acting with the authority of commissioners for HMRC, and that a certificate from the commissioners stating that the officer has this authority wouldbe evidence of that. It is important to understand that all officers of HMRC in exercising their statutory functions act with the authority and under the direction of the HMRC commissioners and that they do so after the appropriate training and in accordance with the legislation and published guidance. Schedule 3 means that MSCs must comply with existing PAYE legislation, including the resultant monthly payments to HMRC and the filing of returns. To require the administration of the PAYE system for MSCs to be dealt with by different HMRC officers from those who deal with employers in general seems an extraordinary proposition, which is rather impractical and therefore not appropriate.
 In terms of the debt transfer provisions under proposed section 688A, the draft regulations published for consultation in February make it quite clear that an MSC debt can arise only by virtue of one of the provisions within the PAYE legislation. If the amendments were adopted, that would result in a wholly anomalous situation whereby employer debts that are established generally would be dealt with by the trained staff in whichever part of HMRC was most appropriate, but identical functions related to MSCs would be vested in specially authorised officers who would fulfil precisely the same role as their non-authorised colleagues. The Committee should think carefully if it is urged to consider those amendments.
 Let me reassure the Committee on the transfer of debt. Given that the transfer notices are expected to be issued infrequently, HMRC intends to vest such work in a central, specialised team that undertakes work of a similar nature. I hope that the hon. Lady will recognise and welcome that confirmation, but I should emphasise that it is my belief the decision should remain operational and should be made by HMRC, and should not be specified in legislation.
Let me turn to the core of the concerns about the transfer of the PAYE debts. We have included the provision because we have encountered a specific problem with MSCs. We have found that when a PAYE or national insurance contributions debt is established, the MSCs frequently escape from making payment by winding up or ceasing to trade and moving workers into a new company, and because MSCs are simply a vehicle through which workers’ income is routed,they often have no assets and so HMRC is unable to recover the unpaid tax and national insurance contributions.
Proposed new section 688A contains provisions to enable regulations to transfer PAYE debts to appropriate third parties when the MSC does not pay. It sets out, of course, who those third parties are. As respondents to the consultation confirmed, the provision for the transfer of debts is essential to ensure that the wider aims of the legislation are achieved. Without it, those promoting and benefiting from the schemes could carry on without any financial risk.
 As the hon. Lady recognised, we made changes as a result of the consultation. However, I am aware that concerns remain about the scope of the transfer provisions, so the three remaining Government amendments represent our considered response to dealing with those concerns. To a large extent, they overtake some of the Opposition’s amendments.
 Government amendment No. 98 will remove the word “facilitated” from proposed new section 688A(2)(c) so that only those who have encouraged or been actively involved in the provision by the MSC of the services of the individual will fall within its scope. Both tests require the third party to have an active role, so those who simply use MSC workers will not be caught. If an end client did more than simply use MSC labour, for example by telling those who it employed that they must move to an MSC, it would fall within the scope of the measure as that would be regarded as encouragement—the hon. Lady asked about that point. That was the reason why we included the word “actively”, which I am glad she welcomed. She asked for clarification of whether the tax clock is ticking from April. I confirm that debts can be transferred only for PAYE or national insurance contributions from August or January, depending on which third party is considered, not from April.
The hon. Lady also voiced her concern about the notion of the power given to an officer who “considers” being rather broad. It is not as broad as it appears; it simply reflects that fact that under existing PAYE legislation, debts may arise both as a result of an employer failing to pay a sum declared as due, and on a sum estimated to be due by HMRC. Proposed new section 688A does not provide for HMRC to create a PAYE debt, but for regulations to enable the transfer of debts that have been created by virtue of existing legislation.
Government amendments Nos. 99 and 100 reflect the consideration that we have given to concerns that employment businesses or agencies might be within the scope of the debt transfer provision, simply as a result of carrying on their normal business of placing individuals. We have considered the risk that such activity might be regarded as “actively involved” under proposed new section 688A(2)(c), and have decided to remove that risk by expanding the exclusion, as set out in proposed new section 688A(3), so that the mere placing of individuals with clients is not within the scope of the provisions. An employment business will be within that scope where it is involved beyond such activity, perhaps by advising workers to use an MSC.

Theresa Villiers: If a recruitment company holds a list of approved suppliers and advisers that it makes available to the contractors with which it works, such as a list of approved suppliers of corporate structures, would that bring it within the scope of the third-party debt rules?

John Healey: I cannot be specific about the judgment to which an HMRC officer might come in those circumstances, but they would increase the potential for a company to fall within the scope of the rules. The Government amendments address the Opposition’s intent and concerns in amendments Nos. 52, 60 and 61.
I turn now to amendments Nos. 53 and 55, which the hon. Lady stressed. Amendment No. 53 seeks to include as a condition of the transfer of debt to other parties, or to workers providing their services, the concept that the person
“knew or should have reasonably been expected to know that the services...were being provided by a managed service company.”
My fear about the amendment is that it does not deal with the evidential concerns, as she argued, but may create them. She is right that dealing with those concerns is the objective of the legislation, but including her wording would open the door to abuse, as it would inevitably lead to legally based claims of ignorance as a defence.
The hon. Lady was rightly concerned about the position of those she termed “ordinary employees” of MSCs. Let me make it clear that we do not intend ordinary employees of MSCs or third parties to be caught by the debt transfer provision. Defining an ordinary employee would be difficult, however, and her attempt to do so made that point for me. Except for MSC directors, providers and associates, the debt transfer provisions cover only those who have encouraged or been actively involved with the supply of labour services through MSCs. It is important to recognise that the transfer of debt regulations include a specific right of appeal on the grounds that
“the amount specified in the transfer notice does not have regard to the degree and extent to which the transferee...has encouraged...or been involved.”
On those grounds, the special commissioners may reduce the amount specified in the transfer notice to a level that, in their opinion, is just and reasonable.
Amendment No. 58 is an attempt to pre-empt a provision that is more appropriate for the regulations. We set out in the draft legislation matters such as the order in which debts may be transferred, the circumstances in which they may be transferred and the rights of appeal against such transfers. In response to the representations made through the consultation, it is our intention to amend the draft regulations to provide further safeguards. I can assure the hon. Lady and members of the Committee that, as part of the process of preparing the regulations for publication next month, I shall consider carefully the point that she made this afternoon.
I hope that the hon. Lady will accept that the amendment would not improve certainty. I also hope that she will accept that the Government amendments take account of concerns that have been raised in discussions and that they will make the legislation work as intended. I hope that she will not press any of her amendments to a vote. She described some as probing amendments, but if she does divide the Committee on any of her amendments, I will ask my hon. Friends to oppose them.

Theresa Villiers: I shall withdraw amendment No. 49, but I would like to press amendments Nos. 53 and 60 to a vote. I am particularly concerned that the Financial Secretary has not responded positively on amendment No. 53. He is concerned about the possibility of legally based claims and defences based on lack of knowledge. As I said, our law deals with that kind of situation in other contexts—in particular, the Insolvency Act 1986—without any problem, as I understand it.
Nor did the Financial Secretary explain why he is rejecting an amendment that uses exactly the same as his letter to me. He seems to believe that the Bill will have a particular impact, yet he is rejecting an amendment to make it clear in the legislation. Sadly, he failed to explain how the Bill will create that result.
I remain concerned about the provisions, in particular the potential impact on completely innocent end clients and the possible disruption to outsourcing in the labour market, so I will be keen to press amendments Nos. 53 and 60 to a Division. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 98, in schedule 3, page 96, line 17, leave out ‘facilitated or otherwise’ and insert ‘or’.—[John Healey.]

Amendment proposed: No. 53, in schedule 3, page 96, line 20, at end insert—
‘(2A) No person shall fall within the scope of subsection (2)(c) above unless they knew or should have reasonably been expected to know that the services of the individual were being provided by a managed service company.’.—[Mrs. Villiers.]

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 16.

Question accordingly negatived.

Amendment proposed: No. 60, in schedule 3, page 96, line 20, at end insert—
‘(2D) A person does not fall within subsection (2)(c) merely by virtue of contracting with businesses who provide the services of individuals to it and which may be MSCs.’.—[Mrs. Villiers.]

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 16.

Question accordingly negatived.

Amendments made: No. 99, in schedule 3, page 96, line 21, after ‘by’ insert ‘virtue of—
(a) ’.
No. 100, in schedule 3, page 96, line 22, at end insert ‘, or
(b) placing the individual with persons who wish to obtain the services of the individual (including by contracting with the MSC for the provision of those services).’.—[John Healey.]

Schedule 3, as amended, agreed to.

Clause 26

Restrictions on trade loss relief for partners

Question proposed, That the clause stand part of the Bill.

Theresa Villiers: The Opposition have grave concerns about the provisions in schedule 4, which is implemented by the clause. I shall address my remarks to that schedule in due course, but I wanted to put it on record that the fact that we shall not vote against the clause is not a reflection of our concerns, as we are very concerned about the matters raised.

Question put and agreed to.

Clause 26 ordered to stand part of the Bill.

Schedule 4

Restrictions on trade loss relief for partners

Theresa Villiers: I beg to move amendment No. 62, in schedule 4, page 98, line 34, leave out from beginning to end of line 34 on page 100.

Eric Illsley: With this it will be convenient to discuss amendment No. 63, in schedule 4, page 99,line 11, leave out ‘£25,000’ and insert ‘£100,000’.

Theresa Villiers: As I have just said, we have grave concerns about schedule 4. The amendment would delete proposed new section 103C of the IncomeTax Act 2007, which is proposed in paragraph 1 of schedule 4. In so doing, the amendment would remove the Government’s restriction on sideways loss relief for non-active partners, as proposed in the schedule. Sideways loss relief allows a partner to set off partnership losses against other income. I understand that it has been part of our tax system for more than50 years. Sideways loss relief is designed to give relief in the early years of a partnership, when losses might be high, as they often are with a start-up business.
In schedule 4, the Government propose a two-stage restriction on sideways loss relief. Proposed newsection 113A of the 2007 Act would disallow any sideways loss relief for arrangements, where one of the main purposes of entering the transaction was tax avoidance. That might not have caused an enormous amount of controversy. There would have been issues to explore around the purpose test and the scope of the proposals, but they would not have caused huge concerns. However, the Treasury proposes to go much further with new section 103C. That will impose significant restrictions on ordinary commercial ventures that are not motivated by tax avoidance. To obtain full sideways loss relief under the proposals in schedule 4, a partner will have to spend 10 hours a week working personally on the partnership’s business. For those partners who do not devote 10 hours a week to the venture, the sideways loss relief that they can claim is limited by the schedule to £25,000.
As the Institute of Chartered Accountants has pointed out:
“The measure is not targeted solely at tax avoidance schemes...The result is that the measure will impact upon many small businesses being set up with substantial investment in the early years.”
The London Society of Chartered Accountants has expressed concern that schedule 4 means that many deserving investment projects will now never see the light of day. It urges the Government to reconsider, and so do the Opposition.
That is why I tabled amendment No. 62 to delete the 10-hour condition and the £25,000 cap. Amendment No. 63, to which I shall come at the end of my remarks, is proposed as a compromise alternative to raise the cap from £25,000 to £100,000, although in our view it would be preferable to opt for amendment No. 62 and the complete deletion of proposed new section 103C.
I point out also that the Committee will soon have the opportunity to consider amendments Nos. 64 and 65, which form a key part of a package of proposals that the Opposition suggest in relation to schedule 4. They would restrict sideways loss relief to those ventures that can pass a demanding threshold designed to show that they are commercially motivated ventures, not artificial tax-avoidance schemes. We recognise that some of the schemes that have utilised sideways loss relief have caused problems in terms of revenue leakage from the Treasury. We do not oppose efforts by the Government to shut down abusive and artificial schemes that are motivated only by tax avoidance and that do not involve genuine commercial risk. However, we are worried that vital commercial ventures will be hammered by the Government’s attempts to shut down problematic tax-avoidance schemes.
The package comprising amendments Nos. 62,64 and 65 is aimed at giving Her Majesty’s Revenue and Customs the power to shut down abusive schemes, but without clobbering genuine enterprise and investment. The Opposition fear that, unless those amendments are adopted, schedule 4 will have a very damaging effect on high-risk investment and small business start-ups.
The first point to make about schedule 4 centres on the way in which the changes were announced on Friday 2 March this year. They were rushed out right at the end of the financial year, when many people had made their plans on the basis that the reliefs would be available. The changes will impact on many ventures in respect of which investments have already been committed on the basis of the existing tax system. Now, investors have had the rug pulled from under their feet, and they find themselves at risk for large amounts of money with no prospect of relieving potential losses in the way in which they had envisaged.
I have received protests on that point from many people, including Mr. Wood of Morgans Independent Advisers, Jeff Moores of Moores Warren, and Richard Grant of Pantheon Financial Management. They point out that the legislation impacts unfairly in treating partners in the same arrangement differently according to whether they contributed earlier or later in the tax year, even if both investments were made before these provisions came into effect. That might not be such a huge problem if the only arrangements hit by the changes were dubious and artificial tax-avoidance schemes, but as I have said, that is not the case. The retroactive nature of schedule 4 adds to the concern of the Opposition about the measures and their impact on ventures and contracts agreed on the basis that sideways loss relief was available.
The Committee may be aware that there was a rapid U-turn when the proposals were initially announced. They were initially due to cover film tax reliefsunder section 42 of the Finance (No. 2) Act 1992 and section 48 of the Finance (No. 2) Act 1997. Within, I think, three working days, there was a rapid about-turn, and the Treasury decided that section 42 and section 48 reliefs would not be restricted. That certainly seemed to make sense, because only a few weeks before that the Treasury had announced a temporary extension of those reliefs. The assumption seems to be that, the section 42 and section 48 problem having been solved, this sorts out the film industry, but that is not the case.
No doubt the Minister will quote back at me statements that suggest that not everyone in the film industry is worried about the remaining provisions in the Bill on sideways loss relief, but I have received a number of very concerned representations on that issue. The film industry has found sideways loss relief so important because of the high degree of risk involved in a film project. It is very difficult to predict in advance whether a film will be successful. Hence, investment proposals are often based around investing in a number of films. The assumption is that, if one backs 20 films, there is a chance that one of them might make money and offset some of the losses from the others. That becomes impossible with the abolition of sideways loss relief.
Sebastian Speight of Ingenious Media has told me that two high-profile UK films, “St. Trinian’s” and “Brideshead Revisited”, had seen their private investment withdrawn as a result of the announcement in schedule 4. These films were relying for up to a third of their funds on investors expecting to be able to reduce the risk of the investment by using sideways relief. Those films were rescued by the Film Council, but it remains a concern as to how other films will find funding in the absence of sideways relief. Mr. Speight put the problem as follows:
“The new film tax credit will provide 20 per cent. of the cost of making a film. However, for larger projects, it is difficult to see where the remaining finance will come from beyond a few national and local grants. Big films need a critical mass of investment before they can be undertaken and this restriction makes it much harder to get.”
The issue here is that part of film funding which is not covered by the film tax credit. Sideways loss relief reduces the high risks for investors who are asked to provide the 80 per cent. of funds that are not covered by the tax credit. The Government’s film tax credit will not work if projects find it impossible to raise the other 80 per cent. of funds that they need. Restricting sideways relief makes that much more difficult.

Variety magazine said that scrapping sideways loss relief would “gut British film production”. Patrick McKenna, a film investment expert, has pointed out that films such as “Vera Drake” or “Girl with a Pearl Earring” would not have been made without sideways loss relief. He told me that many films that are already in production or about to go into production may not now be made. He said:
“The Revenue have taken a very blunt instrument to deal with this. It has not discriminated between bona fide investment and tax abuse.”

Stephen Timms: I have listened to the hon. Lady’s argument with interest. She has acknowledged that the new film tax relief will provide 20 per cent. of funding for films, but she is saying that that is not enough. I presume that she is saying that the public purse should provide a still higher proportion. What proportion does she think should come from the public purse towards the cost of producing a film?

Theresa Villiers: I am saying that the Government should not abolish sideways loss relief, because that relief is reducing the risk that investors face when they go into a film project.
Coupled with restrictions on venture capital trusts, these measures could cause significant problems for the film industry, and the problems for the film sector are replicated in other areas of the creative industries. As with a film project, predicting how the public will respond to a new computer game, for example, is much more difficult than, say, developing a new soap powder or shampoo. Again, sideways relief allowed investors to take a punt on risky proposals for new games, knowing that at least they had the protection of being able to set losses off against other income. I would like to ask the Minister if the Treasury has conducted any research whatsoever on the impact that schedule 4 would have on the hugely important computer games industry.
It would be wrong, however, to think of this issue as a film tax issue, or to think that the creative industries are the only ones that will be affected. The Chancellor has often referred to the “funding gap”, in other words the difficulty that many start-ups have with raising finance. We have always been a nation of inventors and innovators, but far too often we have had difficulty turning those ideas into commercial reality. Sideways loss relief has been one of the few useful mechanisms for bridging that funding gap, and now the Treasury wants to scrap it.
 A number of distinguished academics have indicated serious concern about the impact of schedule 4 on scientific research, which is also something that the Chancellor has repeatedly said that he wants to encourage. Professor Ian Swingland, founder of the Durrell Institute of Conservation and Ecology and Emeritus Chair in Conservation Biology at the University of Kent, has said:
“At least 10 per cent. of high-risk research will be destroyed by this aggressive move against collective investment, and probably more. Many investors will be dissuaded from funding key environmental projects rather than use other existing highly bureaucratic mechanisms. If environmental research and development is to grow in the UK, it is essential that sideways loss relief continues to be available for high-risk and innovative ventures.”
He expanded on those concerns in a letter published in the Financial Times this morning.
The impact of schedule 4 on crucial emerging markets for environmental technology has been raised with me by a number of people. Martin King, who leads the Silver Planet consortium of investors in environmental technology, told me:
“I and a number of colleagues have organised high risk venture funding via Business Angels using the sideways relief that was available to offset failed investments...The changes proposed...in the draft Finance Bill mean that partnerships will not now invest in high risk ventures and in particular research which has been particularly targeted by Treasury. Already we have had to turn down over 20 projects that were of a very high risk nature...Obviously we have informed all those organisations that they cannot be funded in this traditional way and I assume they will have to look overseas for their funding...HMRC have suggested that funding could be switched to State approved schemes such as EIS and VCT but most business angels find the bureaucracy and severe limitations these schemes have to be a real deterrent... Equally the HMRC suggestion that Banks will replace this kind of funding is ludicrous.”
 Tony Blakey, founder of Ethical Trading and Marketing, contacted me to express his grave concern about the impact of schedule 4 on projects to develop technology that is effective in tackling climate change. He is involved with a number of revolutionary projects in areas such as tidal energy, applied accelerated tree-growth technology, accelerated community biomass technology and environmentally-friendly biodiesel production. He believes that if such projects prove successful, the technology that they harness could produce low-cost renewable ways to cover a significant proportion of the world’s energy needs. He tells me that up until 2 March, the UK had a very significant share of that developing market, but now all the projects are likely to go offshore as a result of schedule 4 to Germany, Pakistan, Brazil and other countries. Funds dried up as soon as the 2 March announcement on sideways relief was made.
Mr Blakey told me:
 “The abolition of sideways loss relief has significantly reduced the number of investors willing to risk early stage research funding...Partnerships currently fund vital environmental projects like tidal energy, biodiesel, and accelerated tree growth...These projects cannot now be completed using partnership funding...Foreign investors will benefit as the projects will no longer be controlled or owned by the UK.”
The problem is that no one knows which research will yield results. Of 50 projects to accelerate tree growth to produce cheap environmentally-friendly energy, 49 might fail. Before now, investors at least had the cushion of sideways relief to soften the impact of the losses. The Government propose to remove that cushion, so the risk becomes higher and the funds more difficult to obtain.
 Chris Dodson of Torftech Ltd has also written to me about a range of environmental energy projects that are being shifted overseas as a result of the changes proposed in the Bill. The Chartered Institute of Taxation has told me that schedule 4 is jeopardising projects to make use of the special capital allowances introduced by the Chancellor himself in 2003 to encourage environmental technology.
Rupert Lywood, to whom I referred on Second Reading, is an investor in a partnership pursuing research and development work on lung and bowel cancer vaccines. He is concerned about the impact of schedule 4 on existing and future medical research projects. He commented:
“Investment in private medical research is very high risk, projects such as cancer vaccines research and development couldn’t be contemplated without the availability sideways loss relief...These proposals have a retroactive effect on existing projects and will undoubtedly jeopardise potentially life-saving medical research and the opportunity for UK businesses to lead in important fields of research and profit from international exploitation of newly developed technologies.”
Mr. Lywood tells me that important existing projects on cancer, HIV and multiple sclerosis have already been put in jeopardy by schedule 4.
The proposed 10-hour limit is fundamentally unsuited to this kind of project. Many of the business angels hit by schedule 4 will have investments in a wide spread of high-risk projects. They need to take that approach to spread their risk, and they cannot possibly find 10 hours in every week to devote to each project. The restriction simply misunderstands how such investment projects work.
Nor can HMRC’s approved investment schemes plug the gap left by the abolition of sideways loss relief. HMRC’s response to the concerns expressed about schedule 4 is that those affected should use one of the Government’s state-approved arrangements, such as the enterprise investment scheme or venture capital trusts. Such schemes simply will not take up the slack, because the amounts that can be put into them are limited and, in many ways, they can be bureaucratic, inflexible and expensive to run.
Rupert Lywood has said:
“Everyone supports measures to counteract tax avoidance, but that’s not what these proposals do. What they do, is to create powerful disincentives for individuals wishing to invest in bona fide commercial enterprises which would enhance the UK’s competitiveness and wealth-creation. The Government has reneged on its promise not to use these provisions to disadvantage business. The incentives delivered through the Enterprise Investment Schemes and Venture Capital Trusts have been steadily eroded over recent years to the point where they are now, in practical terms, almost irrelevant as a source of serious capital for new or developing businesses. Sideways loss relief was the last real practical incentive available to encourage private investment is growing enterprises, its removal is completelyat odds with the Government’s objective to encourageenterprise”
The Institute of Chartered Accountants has expressed concern about the impact of schedule 4 on start-up businesses that source finance from family and friends who become non-active or sleeping partners, and it has given a number of examples of micro-business start-ups involving family members that could be hit. Those micro-businesses already face increasing corporation tax rates and possibly problems with the MSC regime, and they are thumped again by the loss of sideways relief that would have provided assistance in the difficult early years of any enterprise.
Amendment No. 63 would increase the cap on sideways relief from £25,000 to £100,000. Of course, if amendment No. 62 were adopted, the need for that change would fall away with the deletion of the cap. I tabled amendment No. 63 for two reasons. First, it is a compromise. If the Government were not able to accept the complete deletion, they might mitigate the damage of section 103 by raising the cap. Secondly, it allows the Committee to probe the Government’s rationale for the £25,000 cap. In making a similar request, the Institute of Chartered Accountants points out that no justification has been given for the imposition of the £25,000 limit—the figure seems to have been plucked out of the air, so I should like the Minister to explain why that figure was chosen.
In conclusion, the Chancellor says that he wants to plug the funding gap, but he is ripping away one of the few measures that helped to do that. In his Budget statement, he said that he wanted the UK to be a world leader in the discovery and development of new energy technologies, yet in the very same Budget, he was proposing to abolish a key tool in driving forward that discovery and development. Schedule 4 would damage the film industry, damage enterprise and investment and damage many projects vital to tackling climate change. I urge the Chief Secretary to think again about schedule 4 and to consider accepting the amendments that I have put forward.

Philip Dunne: At the risk of trying your patience, Mr. Ilsley, and that of other members of the Committee, I wish to contribute at this late hour to the debate on this amendment, because of all the aspects of the Bill, this schedule is the one that will cause most damage to the structure of enterprise in this country and to innovative investment. It is the measure on which I have received the most comments from outside this place, and the one on which I urge the Chief Secretary, whom I know to be a reasonable man, to take note of the arguments that have been so well put by my hon. Friend the Member for Chipping Barnet. He should think again about its impact and what it will do to the growing entrepreneurial and innovative investment climate that has been cultivated in part under his Government—let me give credit where it is due.
The measure will have a major impact in driving investment offshore and shutting down a large proportion of high-risk investment in this country. I should remind the Committee that I am a partner in two partnerships, a farming partnership and an investment partnership. Although they have been going for a long time—they are not new partnerships, so the measure would not directly apply to them—I have experience of investing in partnerships. I know that they provide a valuable structure, not for tax avoidance but for suitable flexible equity involvement in a business by both active partners and those who retire or become less active, as I did when I came into this place. We are at risk of diverting investment activity out of a good structure that exists for positive reasons into sole trading or individual investment, or into a corporate structure in which the ability to offset losses against other kinds of income is not currently threatened. The measure will divert business activity in an entirely unintended way.
The ministerial statement of 2 March from the Paymaster General sought to clarify why the clause was being introduced. She stated:
“The capital contributions to be excluded will be those paid by non-active partners on or after 2 March 2007 where the main purpose, or one of the main purposes, for contributing the capital to the partnership is for the partner to obtain a reduction in tax liability by means of sideways loss relief.”—[Official Report, 2 March 2007; Vol. 457, c. 105WS.]
That is an appropriate measure to deal with tax avoidance, and the Conservative amendments seek to achieve the Government’s precise objective. Their measures will restrict all sorts of other bona fide commercial activity.
 Let me pick up on one other point. Thought has clearly been given to what types of activity will be affected. The ministerial statement specifically carved out high-risk underwriting at Lloyds as an activity that should be exempted from the clause, and it is exempt under proposed new section 103C(8). As my hon. Friend said, there was a U-turn over the film industry, as a special exemption was sought for qualifying expenditure for films, which can now be found in proposed new section 103C(6). However, the ministerial statement referred to professional firms as exempt, but that does not appear in the Bill. Why has the Chief Secretary had a change of heart? Where is the logic behind that decision? If special pleading by a particular industry has found favour in the Treasury and in the Chief Secretary’s deliberations, will he think too about the special pleading on behalf of investors—business angels of the type described by my hon. Friend?
Time is pressing and hon. Members will wish to move on, but I have two more questions. The measure is designed to get at losses generated from the early stages of a partnership. When the Chief Secretary sums up, will he confirm that the provisions will not apply to partnerships that have existed for some time but where losses might legitimately arise as a result of the business getting into difficulty a year or two later? That is not clear from the explanatory notes.
As far as the two limits on working hours and the amount of money that can be invested are concerned, it seems extraordinary that the drafting should apply in such a way that in order to qualify for sideways relief, individuals will be compelled to spend 10 hours a week—presumably the Government will not encourage them to breach the working time directive, so that is25 per cent. of their working time—committed to a project. Most people who invest in high-risk projects and wish to benefit from sideways loss relief are doing so because they are entrepreneurial investors with other activities. They do not necessarily have the relevant skills to work for 10 hours a week in the business.
My hon. Friend referred to individuals who had engaged in biotech research. They might well be entrepreneurs with a commitment to developing new vaccines or environmental energy projects, but they might not necessarily be scientific boffins who could spend the time doing so, and, because of their other activities, they might not have the time to promote the business. There is a lack of logic to the 10-hour limit and an equal lack of logic to the £25,000 limit. If the amendment is put to a vote and not accepted, I urge the Chief Secretary to go away and come back on Report with a more considered clause.

David Gauke: I should like briefly to pursue one of the points that my hon. Friend the Member for Chipping Barnet made about film tax relief. She described how the Treasury’s original proposals appeared to rule out section 42 and section 48 film tax relief.
From my limited experience of the Committee this year and last year, as well as from my experience of a Committee on a statutory instrument, the Treasury devotes a fair amount of attention to film tax. In passing a lot of legislation in such an important and sensitive area, it has no doubt developed a highly skilled team, with much expertise in the field. I should therefore be grateful if the Chief Secretary could tell the Committee whether the Treasury’s film tax experts were consulted on the original proposals on sideways loss relief, and if not, why not. If they were, did they spot the difficulties that became apparent after the original proposals were announced? The Treasury appeared to do a U-turn in three working days, which is fairly quick. I have some experience of seeing the Treasury do U-turns on film tax, but they usually take a matter of months, not days.
The Treasury seems to be particularly sensitive to film tax and to ensuring that the burden does not drive films offshore. I assume that the reason for that is that the film industry is highly mobile, as well as highly innovative and high risk, as my hon. Friend mentioned. If the tax burden were greater, fewer films would be made and the Treasury’s tax revenue would therefore be reduced. I suspect that my hon. Friend the Member for Braintree would describe that as a perfect example of the Laffer curve in operation.
However, could the same principle apply to other sectors? My hon. Friend the Member for Chipping Barnet gave some examples of sectors that perhaps do not have such a well-developed lobbying capability and to which the Government are perhaps not always as sympathetic as they appear to be to the film industry. In the light of the difficulties that emerged with the film industry, as a consequence of the abolition of sideways loss relief, has the Treasury given any consideration to whether any other sectors would be adversely affected by the proposals?

Colin Breed: Once again, we seek through tax avoidance schemes to distinguish between organisations that are genuine commercial enterprises and those that are set up purely to avoid tax. The Chartered Institute of Taxation suggested that the Government consider introducing a motive test, which might have made a contribution, so I should be grateful if the Minister could say whether that proposal was feasible or not.

Adam Afriyie: The schedule seems to reflect a fundamental misunderstanding of the investment environment. It confuses working for an enterprise for 10 hours a week with providing finance for risky ventures, and thereby plugging what is clearly a seedcorn finance problem for many creative industries. I therefore urge the Government to rethink the schedule.

Stephen Timms: I do not want to try to the Committee’s patience unduly, but I certainly do want to respond to some of the points that Opposition Members have made.
 The schedule changes the rules for offsetting the trading loss of a non-active or limited partner in a trading partnership against their other income and capital gains, which is known as sideways loss relief, as we have heard. The Exchequer has incurred significant and growing losses from the misuse of sideways loss relief by wealthy people who participate in partnerships not in anticipation of an investment gain, but purely to access losses—frequently highly contrived in nature rather than real—to reduce their tax on income or capital gains.
 The new rules have been targeted specifically to halt that form of avoidance while preserving access to a significant degree of sideways loss relief for people who are not seeking to avoid tax. On a number of occasions, Opposition Members talked about the abolition or removal of sideways loss relief, but that is not correct. There is a limit in the schedule to the amount of sideways loss relief available, and the vast majority of sideways loss relief that is not motivated by tax avoidance falls within that limit. We are not withdrawing it.

David Gauke: Will the Chief Secretary give way?

Stephen Timms: In a minute.
 I want to make very clear the Government’s position in response to the points that have been made. We have a responsibility to block schemes for tax avoidance. The argument that some ancillary benefit arises from the scheme is not a justification for retaining the ability to establish such schemes. We have introduced a number of measures to encourage productive investment, such as the new film relief measures, and the research and development tax credit, which if I remember rightly, Opposition Members want to abolish. Ours is the proper way to encourage investment.
The claim that some tax avoidance schemes may lead to investment that would not otherwise have occurred is not a justification for leaving tax loopholes in place, and the claims for the amount of investment that may take place are often grossly exaggerated. At the very least, tax avoidance schemes are a deeply inefficient use of public money. Sideways loss relief is not an efficient use of taxpayer funds for promoting the investment that we have heard about; it is deeply inefficient.
Committee members are perfectly entitled to believe that there is a need to use taxpayers’ money to promote investment in a part of the economy, and they are at liberty to propose measures to help, along the lines of the film relief or research and development tax credits. However, let us reject the argument that scams should be left in place because this or that incidental benefit arises from them.
It is very important that we are not naive about what is going on. FT.com on 10 March explained that the schemes
“work by generating trading losses in the first year which high net worth individuals have been able to offset against their earned income for tax purposes using sideways loss relief.”
It quoted Martin Churchill, editor of “Tax Efficient Review”, who said:
“Snipping the sideways loss relief has really choked up these schemes.”
The piece went on:
“He believes that £2 billion would have been poured into those schemes between now”—
10 March—
“and April 5”.
Mr. Churchill was quoted further:
“Everyone was gearing up to put significant amounts of money into these schemes. Bonuses gets paid in February and people don’t tend to do anything until the run up to the end of the tax year”.
We can get an idea of the impact of the change resulting from the announcement through published data on limited liability partnerships. In 2005-06, about 40 per cent. of the total number of partners in avoidance partnerships, which are set up for an avoidance purpose, were recruited after 1 March and before 6 April—just in time for the end of the tax year. In 2006-07, the most recent financial year, only 1.1 per cent. were recruited following the announcement.
The hon. Member for Chipping Barnet explained that amendment No. 62 would completely remove the proposed annual limit on sideways loss relief while amendment No. 63 would increase it to £100,000. We are dealing with a particularly aggressive form of avoidance whereby schemes consistently adapt their arrangements to get around the rules. It has become very clear that a purpose test alone will not deter it.
In response to the hon. Member for South-East Cornwall, there is a purpose test in the Bill, but there is also a limit. We need an annual limit to provide an additional deterrent to the purpose test and to make it uneconomic to challenge the intention of the legislation. An annual limit of £25,000 will achieve that deterrent, comparing the relief gained with the fees required to set up a scheme. A limit of £100,000 would not do so. It would provide a significant incentive to continue to use those schemes to avoid tax, even after allowing for the quite considerable promoters’ fees and for other costs.
In practice, more than 90 per cent. of losses incurred by people in the partnership population who are not motivated by tax avoidance are lower than £25,000. The vast majority of losses that arise to those who are motivated by tax avoidance exceed £25,000. An annual limit of £25,000 strikes the right balance between allowing non-avoiders access to sideways loss relief, while preventing avoiders from abusing it.
The cost of the more modest of these two amendments—raising the limit to £100,000—would be at least £150 million per year. Given behaviour changes on the part of the avoiders, in due course it would quite likely reach the full £400 million score against this measure in the Red Book. It could be more, but we have scored it at £400 million. Of course if the limit were £100,000, and it was economic to avoid tax still by this route, people would set up a whole string of these arrangements so they could continue to avoid tax in this way. I hope that I have explained the purpose of the annual limit and the reason that it is set at £25,000. I hope that the hon. Lady will agree to withdraw her amendments. If not, I shall certainly urge ask my hon. Friends to oppose them.
I should finally like to make a couple of points on films. The hon. Lady quoted a couple of remarks by people in the film industry. Let me just quote Andrew Eaton, co-founder of Revolution Films, who said:
“Everyone has been aware that there have been funds that have been able to make quite a lot of money out of tax schemes and haven’t always been putting money back into the business. There was a very strong sense across the industry that at some point those funds were going to be stopped.”
Indeed, a number of people in the film industry have made the point that what they want is a sustainable industry. It is ludicrous for the hon. Lady to say that the taxpayer must provide not only the 20 per cent. that the tax relief now pays, but the rest of the 80 per cent. cost of producing films too. The film industry is a commercial business like every other. It is in the interests of the industry that it should be viable and commercial.
Finally, I do not accept for a moment——and I did see the letter in the Financial Times this morning——that there will be a huge impact on investment in research and development companies. Since the announcement at the beginning of March, we have received just two specific responses from research and development interests to that publication of the technical note. We considered both those representations carefully, and we are confident that the rationale for the change remains sound. If hon. Members have evidence of actual loss of bona fide investment not motivated by tax avoidance, I invite them to submit it and I will look at it with great interest.
As I said, more than 90 per cent. of the sideways loss relief claims in the past couple of years that have not been motivated by avoidance have been below £25,000, so they will not be affected by the change. I urge the Committee to reject the amendment.

Theresa Villiers: The Chief Secretary seems deliberately to have misunderstood what I was saying and failed to read the amendments. We are not concerned about the scams as the amendments are deliberately designed to allow HMRC to shut down those scams. What we are concerned about are the genuine, bona fide commercial arrangements that will be shut down by schedule 4.

Stephen Timms: I put it to the hon. Lady that her amendments under-estimate the ingenuity of the people responsible for these schemes, who would quickly get round the arrangements that she suggests should be left in place.

Theresa Villiers: The very demanding tests set out in the amendment in the next group would enable HMRC to shut down those schemes. No matter how ingenious the efforts to use sideways loss relief for an abusive purpose, there is a way to ensure that the genuine commercial enterprises are not hit by schedule 4 while at the same time giving the Government the power to shut down the abusive schemes.
I would like to correct the Chief Secretary. I was not saying that the taxpayer should stump up the extra80 per cent. of film funding. I was saying that withdrawal of an important way of reducing the risk of investing would have a significant negative impact on the film industry. The Chief Secretary also said that he would be willing to look at evidence that research projects are being damaged. I believe that I presented such evidence to the Committee and would be only too happy to provide further details of those projects that are going to the wall or going overseas as a result of his proposed changes. I would like to press amendment No. 62 to the vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 8, Noes 18.

Question accordingly negatived.

Eric Illsley: Before we come to the next group of amendments, I have to tell the Committee that I am prepared to go on for a little longer if we can achieve a suitable point in the Government’s programme before adjourning, otherwise we have to adjourn for a dinner break and come back afterwards.

Theresa Villiers: I beg to move amendment No. 64, in schedule 4, page 101, line 12, leave out from ‘if’ to the end of line 14 and insert
‘it is made in connection with any arrangement which is not a qualifying arrangement under section 103E.’.

Eric Illsley: With this it will be convenient to discuss amendment No. 65, in schedule 4, page 104, line 23, at end insert—
‘103E Meaning of “qualifying arrangement”
(1) For the purposes of this chapter, an arrangement is a qualifying arrangement if—
(a) the individual as a partner in a firm or as member of an LLP carries on a trade which is conducted on a commercial basis and with a view to the realisation of profits and involves genuine financial risk; and
(b) before the individual commences carrying on such trade, the Commissioners for Her Majesty’s Revenue and Customs have on the application of the firmor LLP notified the firm or LLP that the Commissioners are satisfied that the arrangement is being entered into for genuine commercial reasons and not as part of a scheme or arrangement of which the sole or main expected benefit is the obtaining of a reduction in tax liability by means of sideways relief or capital gains relief.
(2) An application under subsection (1) shall be in writing and shall contain particulars of the arrangements.
(3) If the Commissioners for Her Majesty’s Revenue and Customs consider that the particulars or any further information provided under subsection (1) of this subsection are insufficient for the purposes of this section, they must notify the applicant as to what further information they require for those purposes within 30 days of receiving the particulars or information.
(4) If any such further information is not provided within30 days from the notification, or such further time as the Commissioners allow, they need not proceed further on the application.
(5) The Commissioners for Her Majesty’s Revenue and Customs shall notify their decision to the applicant within30 days of receiving the application under subsection (1)(b) or, if they give notice under subsection (3) above, within 30 days of the notice being complied with.
(6) If the Commissioners for Her Majesty’s Revenue and Customs notify the applicant that they are not satisfied as mentioned in subsection (1)(b) above or do not notifytheir decision to the applicant within the time required by subsection (3) above, the applicant may within 30 days of the notification of that time require the Commissioners to transmit the application, together with any notice given and further particulars furnished under subsection (3) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (1) above as if it were a notification by the Commissioners.
(7) If any particulars furnished under this section do not fully and accurately disclose all facts and considerations material for the decision of the Commissioners for Her Majesty’s Revenue and Customs or the Special Commissioners, any resulting notification that the Commissioners or Special Commissioners are satisfied as mentioned in subsection (1)(b) above shall be void.
(8) The Commissioners for Her Majesty’s Revenue and Customs may by regulations provide that any activities of a specified description shall be precluded from being qualifying arrangements for the purpose of this section, where specified means specified in the regulations.
(9) The regulations under subsection (8) above may—
(a) make provision having retrospective effect,
(b) contain incidental, supplemental, consequential and transitional provisions and savings, and
(c) make different provisions for different cases or purposes.
(10) No regulations may be made under this section unless a draft of them has been laid before and approved by a resolution of the House of Commons.’.

Theresa Villiers: I can be very brief on amendmentNo. 64.
The amendments put into practice the entirely responsible approach that the Opposition has taken on sideways loss relief to ensure that the dire consequences predicted by the Chief Secretary would not happen. The conditions set out in the amendments would enable abusive schemes to be shut down while ensuring that genuine commercial enterprise could continue. Critical to our proposal is that schemes and transactions should qualify for sideways relief only where the venture involves genuine financial risk. Tax-motivated schemes generally do not involve that risk, so this is a key divider.
Proposed section 103E would add to the safeguards by providing that an arrangement would not qualify for sideways relief where the sole or main expected benefit was the reduction of tax. There is even a further safeguard in that only HMRC-approved schemes could obtain relief from the package that the Opposition is putting forward, which gives HMRC ample scope to crack down on those ingenious avoiders that the Chief Secretary is so worried about. Proposed subsection (8) would provide yet more protection in that it would allow HMRC to prohibit the use of sideways relief in sectors in which there are significant concerns. Such concerns have arisen in areas such as property development, hotels and residential care homes, which are not generally associated with the high-risk sectors that we have been discussing.
 Lastly, I come to proposed subsection (9), which I was not sure whether to include, because it is quite draconian. It would give the Treasury the power to adopt regulations with retrospective effect to close down abusive and problematic schemes. Retrospective legislation must always be approached with extreme care and should be used only when there are genuinely special circumstances to justify that approach. In this case, I would use it to give the Chief Secretary the reassurance that he needs. I regret that the Government do not accept the Opposition’s entirely cautious and responsible approach, which would help to save the high-risk enterprises that are, sadly, being put in jeopardy by the schedule.

Stephen Timms: I certainly agree that what the hon. Lady proposes is draconian. The amendment would ensure that in every case in which an individual partner proposed to commence business in a trading partnership or, indeed, enter into an arrangement in connection with the business, that partner would have to seek advance clearance from Revenue and Customs. If HMRC was not satisfied or did not notify its decision within 30 days, the case would be referred to the special commissioner.
That would mean that if an individual partner did not seek advance clearance from HMRC before starting a partnership, they would never be able to claim sideways loss relief or capital gains relief for any losses that they made as a limited partner or non-active partner in that partnership. I simply cannot believe that the hon. Lady really intends to impose such an enormous bureaucratic burden on potential investors. It would simply be unworkable.
It is also worth considering who would want to seek a clearance and why. The avoidance arrangements that are caught by the measure are not entered into accidentally. People who use a scheme to create a contrived loss will know that a main purpose of the scheme is to create a loss and gain a tax advantage. It could certainly be expected that avoiders would, as they have frequently done, attempt to dress up avoidance schemes as commercial transactions and would seek clearance through the procedure that the hon. Lady proposes before investing in a scheme.
 Conversely, a genuine investor would not anticipate making a loss, or, at least, the existence of sideways loss relief would not be the decisive factor in the investment, so they would have no reason to seek pre-transaction clearance. It is, therefore, clear that a clearance regime would not be appropriate. It would not provide any benefit to the non-avoiding population, but would impose disproportionate and unworkable administrative burdens on them. I hope that with that explanation the hon. Lady will withdraw the amendment. If not, I ask my hon. Friends to oppose it.

Theresa Villiers: I shall not press the amendment, as the Committee has had ample opportunity to vote on this issue already. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question put, That this schedule be the Fourth schedule to the Bill.

The Committee divided: Ayes 18, Noes 6.

Question accordingly agreed to.

Schedule 4 agreed to.
 Further consideration adjourned.—[Kevin Brennan.]

Adjourned accordingly twenty-eight minutes toEight o’clock till Thursday 17 May at Nine o’clock.